"..."We have organized crime specialized in finance. As a consequence of the discovery of the theft, the banks stopped issuing loans
for a while. There was a domino effect which hit the leu.""
July 2, 2015
Local franchise of accountancy giant Grant Thornton was working for three of the country's largest banks when $1bn was embezzled
One of the world's leading auditors has been accused of negligence and incompetence after $1bn was siphoned out of
Moldova from under its nose – a sum equivalent to 15% of the
former Soviet republic's GDP.
Grant Thornton, the UK based accountancy giant with local franchises in dozens of countries, was the auditor for three of Moldova's
largest banks through which the money was embezzled and spirited out of the country in complex financial transactions, some through
UK companies.
As a result, the authorities had to rescue the three banks with a bailout equivalent to half the annual budget. The knock-on effect
was a currency collapse and a plunge towards recession, ruining the economy almost overnight. Moldova is already Europe's poorest
country.
The theft was discovered in November 2014 at Unibank, Banca de Economii and Banca Sociala , which the Moldovan member of Grant
Thornton, a global network of independent firms, has been auditing since 2010, 2011 and 2013 respectively.
Iurie Chirinciuc, a Moldovan MP who was part of a commission set up to investigate the affair, believes Grant Thornton was negligent
and obstructive.
"All the [audit] reports give positive opinions," he said. "How can you give a positive opinion when the situation at these banks
was so grave?"
Grant Thornton said it drew the attention of the banks and relevant authorities to its concerns about the banks and that its audit
reports contained alerts about loans. But Chirinciuc said it should not have given the banks a generally clean bill of health.
He claims repeated requests for the auditors to give testimony to the inquiry were "vehemently opposed".
"I have made a formal request for analysis of Grant Thornton to the central bank," Chirinciuc said. "In the commission, I was
shocked to see that all state institutions were informed and updated as to the situation at the banks, but did not intervene. These
circumstances make me think that very high-ranking dignitaries are involved in the theft of the billion."
Chirinciuc was also aghast that after the fraud was discovered, Grant Thornton's Moldova director, Stéphane Bridé, was appointed
economy minister. Bridé told the Guardian his nomination "was made in conformity with the legislation of the Republic of Moldova,
according to which my professional qualities and experience were exclusively considered".
Multiple spurious loans were granted by Banca de Economii and Unibank on the basis of false guarantees to companies that then transferred
the money offshore. Some went to British companies controlled by entities registered in places where directors' identities are kept
secret.Two preliminary reports – one by the parliamentary commission and the other by corporate investigation firm Kroll – suggest
that fraud eventually became the main occupation of the banks.
The parliamentary report says: "The management of the banks have manifested evident lapses in professionalism and integrity …
by giving credits that were compromised from the beginning" and made transactions of "fictional and fraudulent character". The MPs
concluded the banks had knowingly endangered their "capacity to make basic operations" such as paying out pensions and public sector
salaries.
The banks consistently misrepresented cash balances by using unorthodox "overnight deposits" – zero-interest deposits from Russian
banks Interprombank, Gazprombank, Alef Bank and Metrobank – to disguise the lack of capital while continuing to give out nonperforming
loans. "In essence these operations were operations of manipulation," the parliamentary report says.
So contaminated have the banks become that the IMF and World Bank have suspended programmes with Moldova, and the EU is considering
following suit. World Bank country manager Alex Kremer said last week: "We are advising the authorities that the three banks ...
should be liquidated." He said trying to nationalise or recapitalise the banks would risk wasting more taxpayers' money.
Moldovan prosecutors have since launched an investigation that has so far put about 30 people under criminal indictment, including
bank executives. Among these is Ilan Shor, chairman of the board at Banca de Economii since April 2014, allegedly the mastermind.
Shor was released from house arrest on 23 May, having agreed to cooperate with investigators. The chief prosecutor has not returned
a request for comment. Shor denies wrongdoing. Earlier this month, he was elected mayor of the small town of Orhei.
Kroll's confidential report was published online in April
by the speaker of the Moldovan parliament, Andrian Candu. It says a group of companies under Shor's control gradually took over the
banks and in 2010 started giving never-to-be-repaid loans to themselves. When watchdogs closed in, "orders were given by management
of the banks to archive loan documentation relating to the suspicious transactions". A vehicle belonging to another Shor company
that collected the paperwork was subsequently stolen and burned.
Between 2011, when Shor's companies were allegedly beginning to sink their teeth into the banks, and October 2014 when the scam
went bust, Kroll found the number of Shor-related companies involved grew from 10 to 39. By December 2014, 90% of Unibank's loans
were to Shor group companies. Deposits recorded as being from Russian banks, which enabled Banca de Economii to make huge loans,
were not received.
"Ilan Shor and individuals associated with him played an integral role in coordinating this activity," Kroll says in its report,
claiming there was "a deliberate intention to extract as much benefit as possible for entities connected to Mr Shor and to the detriment
of the bank". A Kroll representative said the report was leaked without consent and declined to comment further.
The "missing billion" contributed to a run on the Moldovan leu in which it lost a quarter of its value against the dollar in February.
Grant Thornton had no presence in Moldova before 2010, but its ascent has been startling. Seven of the country's 14 biggest banks
became its clients in the space of four years, making it by far the biggest player in the market. International competitors such
as KPMG and Deloitte steadily lost Moldova to Grant Thornton, with neither having more than two major banks on their roster in the
country by 2013.
Representatives of the Moldovan Grant Thornton franchise deny impropriety and say that that auditors cannot be held responsible
if clients do not disclose full financial information.
"While we would like to detect all fraud, according to International Standards of Auditing, the auditors' role is not to discover
fraud, or to prosecute clients for fraud," they said in a statement. "We stand by the quality of our work – which is public record
- and believe the audit opinions were correct under the circumstances."
A spokesman for the global office said Grant Thornton member firms acted autonomously and their work was only scrutinised by head
office every three years. It did not respond to a question asking what it planned to do about its relationship with GT Moldova.
A Moldovan financial system insider who wishes to remain anonymous said: "It's clear Grant Thornton was at least negligent if
not worse. How could it not have known what was going on, especially at Unibank where the scam was almost total?"
In its response, GT Moldova said: "Various observations were mentioned annually in the letters we addressed to management and
shareholders of these banks and to the National Banks of Moldova.
"We wish to remind you that in 2013, the inquiry commission for the assets of Banca de Economii was based not only on the audit
of the court and reports of the International Monetary Fund but also mentions of Grant Thornton audit."
The effect of the financial loss has been felt by ordinary Moldovans. Ion Preașcă, a finance journalist in ther capital Chișinău,
said: "We have organised crime specialised in finance. As a consequence of the discovery of the theft, the banks stopped issuing
loans for a while. There was a domino effect which hit the leu."
Alexei, who owns a small construction business, said: "They will invent some new taxes to make up for the damage. I had an account
at Banca Sociala and have stopped using it since. I opened two new accounts in banks with foreign ownership."
Natasha, a bookkeeper, said: "The resulting price rises had bad effects. The electricity price nearly doubled from one month to
the next. The bill was 300 lei [£10] and it's now 500. Pensions and salaries haven't increased."
The criminal investigation is ongoing. Neither the Moldovan National Bank or government returned requests for information. An
estimated 50,000 Moldovans protested on 3 May in Chișinău, demanding justice and the recovery of the stolen money.
Thanks to Iurie Sanduta, editor of www.rise.md, for help researching this article.
Exports of goods and services of Ukrainian production in 2015 will fall by about a third. And
this is not surprising: as a result of "reforms" in the country almost died the industry lost its
main Russian market, where Ukraine has supplied products with high added value. The cumulative figure
of industrial production YTD is approximately -15%. The main export product of Ukraine for the first
time since the pre-industrial era were products of agriculture. In the first place - corn.
Exports of goods and services of Ukrainian production in 2015 will fall by about a third. And
this is not surprising: as a result of "reforms" in the country almost died the industry lost its
main Russian market, where Ukraine has supplied products with high added value. The cumulative figure
of industrial production YTD is approximately -15%. The main export product of Ukraine for the first
time since the pre-industrial era were products of agriculture. In the first place - corn.
Exports of goods and services of Ukrainian production in 2015 will fall by about a third. And
this is not surprising: as a result of "reforms" in the country almost died the industry lost its
main Russian market, where Ukraine has supplied products with high added value. The cumulative figure
of industrial production YTD is approximately -15%. The main export product of Ukraine for the first
time since the pre-industrial era were products of agriculture. In the first place - corn.
"... I'm still trying to think through the implications but they are certainly disquieting. Without trying to hard I'd summarize that "the masks are coming off." ..."
"... The question then is, what happens after "the masks come off?" ..."
"... Short-sighted western pundits will still be penning deadline copy headlined "How Putin lost Ukraine" while those with real vision will be putting the finishing touches on "How America Lost the Rest of the World" ..."
Hard to overstate the importance of this article. Thanks for spotting it.
There's a lot here
but this passage is kind of free-standing in its value by simply condensing how the IMF has contorted
itself:
"The IMF thus is breaking four rules:
Not lending to a country that has no visible means to
pay back the loan breaks the "No More Argentinas" rule adopted after the IMF's disastrous 2001
loan.
Not lending to countries that refuse in good faith to negotiate with their official creditors
goes against the IMF's role as the major tool of the global creditors' cartel.
And the IMF is
now lending to a borrower at war, indeed one that is destroying its export capacity and hence
its balance-of-payments ability to pay back the loan.
Finally, the IMF is lending to a country
that has little likelihood of refuse carrying out the IMF's notorious austerity "conditionalities"
on its population – without putting down democratic opposition in a totalitarian manner. Instead
of being treated as an outcast from the international financial system, Ukraine is being welcomed
and financed."
I'm still trying to think through the implications but they are certainly disquieting. Without
trying to hard I'd summarize that "the masks are coming off."
The question then is, what happens after "the masks come off?"
… war.
(Sometimes it's best just to blurt out what's worrying you.)
Short-sighted western pundits will still be penning deadline copy headlined "How Putin lost
Ukraine" while those with real vision will be putting the finishing touches on "How America Lost
the Rest of the World".
"... How could Ukraine's government deficit only be 4.1% when its currency has crashed, it has lost most of its sources of income and it has just defaulted on its debt? What the fuck are they talking about? ..."
"... First, there is no way on God's green earth that there is a negative difference of only 4.1% between Ukraine's annual revenues and its annual expenditures, especially since it has almost no revenues except from taxation. ..."
Start shovelin' in the money, IMF, because Ukraine has the magic formula – just refuse to pay
what you owe, call it a 'temporary suspension of payments' instead of 'a default', and reap the
reward for your display of responsibility.
I foresee the mileage Russia is going to get out of this will far exceed the value of the $3
Billion.
marknesop, December 19, 2015 at 8:47 pm
How could Ukraine's government deficit only be 4.1% when its currency has crashed, it has
lost most of its sources of income and it has just defaulted on its debt? What the fuck are they
talking about?
"The proposed budget would work to reduce the government's deficit from 4.1% to 3.7%, with
measures including an increase in revenue by widening the tax base."
First, there is no way on God's green earth that there is a negative difference of only
4.1% between Ukraine's annual revenues and its annual expenditures, especially since it has almost
no revenues except from taxation.
And now the IMF expects to realize more revenue from widening the tax base – yes, I can imagine
what a popular initiative that is. Now you know how Yushchenko felt, Yatsie, when the IMF denied
him a second big loan because he refused to eliminate the gas subsidies to residents.
Now the IMF has finally realized that triumph through a different leader, and it wants to see
even more tax revenue. You are about to be as popular as a turd in the punch bowl; have fun with
that.
kirill, December 20, 2015 at 12:58 pm
I would not trust any GDP numbers from the Kiev regime either. They lost 25% of the economy
in the Donbas alone not counting Crimea. This has knock on effects to the rest of Banderastan.
Yet they are yapping about some 12% contraction in 2015 after a 7% contraction in 2014. I see
no clear indication that they are counting the GDP only for regime controlled Banderastan.
As for the budget, according to regime officials, Banderastan lost 30% of its hard currency
revenues with the loss of the Donbass. I estimate the tax loss to Kiev to be about 30% as well.
The Donbass was the industrialized part of the country while western Banderastan is primarily
agrarian. So talk about 4% shortfalls in revenue is utter rubbish. In most countries the money
making parts of the economy subsidize the rest and sure as hell it was not western Banderastan
that was subsidizing the Donbass. That was just virulent blood libel such as the claim that Russians
settled eastern Ukraine only after the Holodomor.
marknesop, December 20, 2015 at 1:13 pm
Europe deserves Ukraine. Let them have it, the quicker the better. It's fine when Yats is selling
that stinking mess to his simple-minded constituents, but European policymakers will see through
it right away. Unfortunately, Brussels knows better than to bring Ukraine any closer into the
fold, because if they get a visa-free regime, the place will empty out in a week as Ukrainians
flee throughout Europe (which is already, everyone must know, full of refugees) looking for jobs.
Yves here. If you followed the TransPacific Partnership negotiations closely, you may recall that
Japan looked like it was going along only to placate Washington, and then it signed up only because
the US allowed it to drop its "defense only" posture (remember that Japan is a military protectorate
of the US) and gave major concession on agriculture (Japan's farmers are a famously powerful voting
block). But even then, Japan is not firmly in the US fold. It has made clear that the US needs to
get a deal done pronto.
By contrast, this post describes the US foot-dragging and gamesmanship to protect US agricultural
interests from competition from developing economies.
Yesterday, U.S. Trade Representative Michael Froman delivered his plenary statement to the trade
ministers gathered in Nairobi for the World Trade Organization's tenth ministerial conference. His
statement, which calls for the abandonment of the Doha Development Round in favor of negotiations
on new issues of more strategic interest to the United States, deserve a response from a countryman.
Mr. Froman calls on trade representatives "to move beyond the cynical repetition of positions
designed to produce deadlock." Yet this is precisely what Mr. Froman has come to Nairobi to repeat:
U.S. positions designed to produce deadlock.
He decries the lack of progress in the last 15 years of Doha negotiations, yet he fails to acknowledge
that the United States has been, and remains, the principal reason for that failure. Since 2008,
when negotiations broke down, the U.S. has refused to continue negotiating on the key issues central
to the development agenda – reducing agricultural subsidies, allowing developing countries special
protection measures for agriculture, eliminating export subsidies and credits, and a host of other
issues.
Those issues remain critical to developing countries, and U.S. intransigence in addressing those
concerns is the main reason Doha has stagnated. In addition, the U.S. has introduced new issues to
create further obstacles to progress, such as its objection to India's ambitious and laudable public
stockholding program to provide food security to fully two-thirds of its people.
The draft declaration on agriculture in Nairobi offers no progress on resolving this issue, despite
the explicit commitment in Bali and later in Geneva to find a permanent solution that can allow India
and other countries to pursue such programs.
That is not the only developing country issue left unaddressed. The declaration offers nothing
to developing countries to allow them to protect sensitive sectors from unfair or sudden import surges,
the Special Safeguard Mechanism. It offers no meaningful cuts in U.S. export credits, which have
favored U.S. exporters to Africa with some $1.25 billion in credits over the last six years.
Perhaps most notably, the declaration makes no mention of the key issue in the Doha Round: reductions
in rich country agricultural subsidies and supports. With crop prices low and a new Farm Bill authorizing
rising levels of support to U.S. farmers and exporters, this omission is a direct blow to those developing
countries which see their farmers and export prospects harmed by underpriced U.S. exports.
Nor does Mr. Froman mention cotton subsidies, an issue which the United States and the WTO membership
committed to address "expeditiously" ten long years ago in Hong Kong. The issue remains unresolved,
and the draft agriculture text fails to offer anything to Africa's C-4 cotton producing countries,
which have millions of poor farmers desperately in need of relief.
Instead, the U.S. Farm Bill promises further price suppression. According to a recent study, cotton
subsidies could total $1.5 billion, increasing U.S. exports 29% and suppressing prices by 7%. All
cotton producers in the rest of the world will suffer an estimated $3.3 billion in annual losses,
with India projected to lose $800 million per year.
The C-4 countries as a group stand to lose $80 million a year in reduced income, a huge blow to
struggling farmers in low-income countries.
Mr. Froman touts the ways U.S. policy has moved forward beyond Doha. He says the United States
extended the African Growth and Opportunity Act by a decade, "the longest extension in that program's
history." That limited extension of trade preferences to African countries last year provided a paltry
$264,000 in benefits to the C-4 countries. The projected losses from U.S. cotton dumping are 300
times greater.
Mr. Froman concludes that with a new approach that abandons the development round while taking
up issues of investment, procurement, and other matters of priority to the United States, "we can
ensure that global trade will drive development and prosperity as strongly this century as it did
in the last."
The U.S. Trade Representative seems to have conveniently forgotten that the Doha Development Round
he wants to sweep aside was a direct response to the fact that global trade rules in the last century
failed to drive development and prosperity, at least for many developing countries.
As a U.S. researcher long engaged with the issues of concern to developing countries, I find Mr.
Froman's approach shameful. Multilateralism demands engagement and compromise, particularly in a
"development round" designed to address past inequities. Mr. Froman is unfortunately offering nothing
more than "the cynical repetition of positions designed to produce deadlock." The latest in a steady
stream of U.S. hypocrisy.
By Timothy Wise, Director of the Research and Policy Program at the Global Development
and Environment Institute, Tufts University. Originally published in
The Standard (Nairobi, Kenya)
"... By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is ..."
"... KILLING THE HOST: How Financial Parasites and Debt Bondage Destroy the Global Economy ..."
"... What especially annoys U.S. financial strategists is that this loan by Russia's sovereign debt fund was protected by IMF lending practice, which at that time ensured collectability by withholding new credit from countries in default of foreign official debts (or at least, not bargaining in good faith to pay). To cap matters, the bonds are registered under London's creditor-oriented rules and courts. ..."
"... After the rules change, Aslund later noted, "the IMF can continue to give Ukraine loans regardless of what Ukraine does about its credit from Russia, which falls due on December 20. [8] ..."
"... The post-2010 loan packages to Greece are a notorious case in point. The IMF staff calculated that Greece could not possibly pay the balance that was set to bail out foreign banks and bondholders. Many Board members agreed (and subsequently have gone public with their whistle-blowing). Their protests didn't matter. Dominique Strauss-Kahn backed the US-ECB position (after President Barack Obama and Treasury secretary Tim Geithner pointed out that U.S. banks had written credit default swaps betting that Greece could pay, and would lose money if there were a debt writedown). In 2015, Christine Lagarde also backed the U.S.-European Central Bank hard line, against staff protests. [10] ..."
"... China and Russia harbored the fantasy that would be allowed redress in the Western Courts where international law is metered out. They are now no longer under that delusion. ..."
"... It's not Hudson but the US that has simplified the entire world situation into "good guys vs. bad guys", a policy enshrined in Rumsfeld's statement "you're either with us or you're against us". ..."
"... what is left unsaid is the choices Russia then faces once their legal options play out and the uneven playing field is fully exposed. Do they not then have a historically justifiable basis for declaring war? ..."
The nightmare scenario of U.S. geopolitical strategists seems to be coming true: foreign economic
independence from U.S. control. Instead of privatizing and neoliberalizing the world under U.S.-centered
financial planning and ownership, the Russian and Chinese governments are investing in neighboring
economies on terms that cement Eurasian economic integration on the basis of Russian oil and tax
exports and Chinese financing. The Asian Infrastructure Investment Bank (AIIB) threatens to replace
the IMF and World Bank programs that favor U.S. suppliers, banks and bondholders (with the United
States holding unique veto power).
Russia's 2013 loan to Ukraine, made at the request of Ukraine's elected pro-Russian government,
demonstrated the benefits of mutual trade and investment relations between the two countries. As
Russian finance minister Anton Siluanov points out, Ukraine's "international reserves were barely
enough to cover three months' imports, and no other creditor was prepared to lend on terms acceptable
to Kiev. Yet Russia provided $3 billion of much-needed funding at a 5 per cent interest rate, when
Ukraine's bonds were yielding nearly 12 per cent."[1]
What especially annoys U.S. financial strategists is that this loan by Russia's sovereign
debt fund was protected by IMF lending practice, which at that time ensured collectability by withholding
new credit from countries in default of foreign official debts (or at least, not bargaining in good
faith to pay). To cap matters, the bonds are registered under London's creditor-oriented rules and
courts.
On December 3 (one week before the IMF changed its rules so as to hurt Russia), Prime Minister
Putin proposed that Russia "and other Eurasian Economic Union countries should kick-off consultations
with members of the Shanghai Cooperation Organisation (SCO) and the Association of Southeast Asian
Nations (ASEAN) on a possible economic partnership."[2]
Russia also is seeking to build pipelines to Europe through friendly instead of U.S.-backed countries.
Moving to denominate their trade and investment in their own currencies instead of dollars, China
and Russia are creating a geopolitical system free from U.S. control. After U.S. officials threatened
to derange Russia's banking linkages by cutting it off from the SWIFT interbank clearing system,
China accelerated its creation of the alternative China International Payments System (CIPS), with
its own credit card system to protect Eurasian economies from the shrill threats made by U.S. unilateralists.
Russia and China are simply doing what the United States has long done: using trade and credit
linkages to cement their geopolitical diplomacy. This tectonic geopolitical shift is a Copernican
threat to New Cold War ideology: Instead of the world economy revolving around the United States
(the Ptolemaic idea of America as "the indispensible nation"), it may revolve around Eurasia. As
long as the global financial papacy remains grounded in Washington at the offices of the IMF and
World Bank, such a shift in the center of gravity will be fought with all the power of the American
Century (indeed, American Millennium) inquisition.
Imagine the following scenario five years from now. China will have spent half a decade building
high-speed railroads, ports power systems and other construction for Asian and African countries,
enabling them to grow and export more. These exports will be coming on line to repay the infrastructure
loans. Also, suppose that Russia has been supplying the oil and gas energy needed for these projects.
To U.S. neocons this specter of AIIB government-to-government lending and investment creates fear
of a world independent of U.S. control. Nations would mint their own money and hold each other's
debt in their international reserves instead of borrowing or holding dollars and subordinating their
financial planning to the IMF and U.S. Treasury with their demands for monetary bloodletting and
austerity for debtor countries. There would be less need for foreign government to finance budget
shortfalls by selling off their key public infrastructure privatizing their economies. Instead of
dismantling public spending, the AIIB and a broader Eurasian economic union would do what the United
States itself practices, and seek self-sufficiency in basic needs such as food, technology, banking,
credit creation and monetary policy.
With this prospect in mind, suppose an American diplomat meets with the leaders of debtors to
China, Russia and the AIIB and makes the following proposal: "Now that you've got your increased
production in place, why repay? We'll make you rich if you stiff our New Cold War adversaries and
turn to the West. We and our European allies will help you assign the infrastructure to yourselves
and your supporters, and give these assets market value by selling shares in New York and London.
Then, you can spend your surpluses in the West."
How can China or Russia collect in such a situation? They can sue. But what court will recognize
their claim – that is, what court that the West would pay attention to?
That is the kind of scenario U.S. State Department and Treasury officials have been discussing
for more than a year. The looming conflict was made immediate by Ukraine's $3 billion debt to Russia
falling due by December 20, 2015. Ukraine's U.S.-backed regime has announced its intention to default.
U.S. lobbyists have just changed the IMF rules to remove a critical lever on which Russia and other
governments have long relied to enforce payment of their loans.
The IMF's Role as Enforcer of Inter-Government Debts
When it comes down to enforcing nations to pay inter-government debts, the International Monetary
Fund and Paris Club hold the main leverage. As coordinator of central bank "stabilization" loans
(the neoliberal euphemism for imposing austerity and destabilizing debtor economies, Greece-style),
the IMF is able to withhold not only its own credit but also that of governments and global banks
participating when debtor countries need refinancing. Countries that do not agree to privatize their
infrastructure and sell it to Western buyers are threatened with sanctions, backed by U.S.-sponsored
"regime change" and "democracy promotion" Maidan-style.
This was the setting on December 8, when Chief IMF Spokesman Gerry Rice announced: "The IMF's
Executive Board met today and agreed to change the current policy on non-toleration of arrears to
official creditors." The creditor leverage that the IMF has used is that if a nation is in financial
arrears to any government, it cannot qualify for an IMF loan – and hence, for packages involving
other governments. This has been the system by which the dollarized global financial system has worked
for half a century. The beneficiaries have been creditors in US dollars.
In this U.S.-centered worldview, China and Russia loom as the great potential adversaries – defined
as independent power centers from the United States as they create the Shanghai Cooperation Organization
as an alternative to NATO, and the AIIB as an alternative to the IMF and World Bank tandem. The very
name, Asian Infrastructure Investment Bank, implies that transportation systems and other
infrastructure will be financed by governments, not relinquished into private hands to become rent-extracting
opportunities financed by U.S.-centered bank credit to turn the rent into a flow of interest payments.
The focus on a mixed public/private economy sets the AIIB at odds with the Trans-Pacific Partnership
(TPP) and its aim of relinquishing government planning power to the financial and corporate sector
for their own short-term gains, and above all the aim of blocking government's money-creating power
and financial regulation. Chief Nomura economist Richard Koo, explained the logic of viewing the
AIIB as a threat to the US-controlled IMF: "If the IMF's rival is heavily under China's influence,
countries receiving its support will rebuild their economies under what is effectively Chinese guidance,
increasing the likelihood they will fall directly or indirectly under that country's influence."[3]
Russian Finance Minister Anton Siluanov accused the IMF decision of being "hasty and biased."[4]
But it had been discussed all year long, calculating a range of scenarios for a long-term sea change
in international law. The aim of this change is to isolate not only Russia, but even more China in
its role as creditor to African countries and prospective AIIB borrowers. U.S. officials walked into
the IMF headquarters in Washington with the legal equivalent of financial suicide vests, having decided
that the time had come to derail Russia's ability to collect on its sovereign loan to Ukraine, and
of even larger import, China's plan for a New Silk Road integrating a Eurasian economy independent
of U.S. financial and trade control. Anders Aslund, senior fellow at the NATO-oriented Atlantic Council,
points out:
The IMF staff started contemplating a rule change in the spring of 2013 because nontraditional
creditors, such as China, had started providing developing countries with large loans. One issue
was that these loans were issued on conditions out of line with IMF practice. China wasn't a member
of the Paris Club, where loan restructuring is usually discussed, so it was time to update the rules.
The IMF intended to adopt a new policy in the spring of 2016, but the dispute over Russia's $3
billion loan to Ukraine has accelerated an otherwise slow decision-making process.[5]
The Wall Street Journal concurred that the underlying motivation for changing the IMF's rules
was the threat that Chinese lending would provide an alternative to IMF loans and its demands for
austerity. "IMF-watchers said the fund was originally thinking of ensuring China wouldn't be able
to foil IMF lending to member countries seeking bailouts as Beijing ramped up loans to developing
economies around the world."[6]
In short, U.S. strategists have designed a policy to block trade and financial agreements organized
outside of U.S. control and that of the IMF and World Bank in which it holds unique veto power.
The plan is simple enough. Trade follows finance, and the creditor usually calls the tune. That
is how the United States has used the Dollar Standard to steer Third World trade and investment since
World War II along lines benefiting the U.S. economy.
The cement of trade credit and bank lending is the ability of creditors to collect on the international
debts being negotiated. That is why the United States and other creditor nations have used the IMF
as an intermediary to act as "honest broker" for loan consortia. ("Honest broker" means in practice
being subject to U.S. veto power.) To enforce its financial leverage, the IMF has long followed the
rule that it will not sponsor any loan agreement or refinancing for governments that are in default
of debts owed to other governments. However, as the afore-mentioned Aslund explains, the IMF could
easily
change its practice of not lending into [countries in official] arrears … because it is not
incorporated into the IMF Articles of Agreement, that is, the IMF statutes. The IMF Executive
Board can decide to change this policy with a simple board majority. The IMF has lent to Afghanistan,
Georgia, and Iraq in the midst of war, and Russia has no veto right, holding only 2.39 percent
of the votes in the IMF. When the IMF has lent to Georgia and Ukraine, the other members of its
Executive Board have overruled Russia.[7]
After the rules change, Aslund later noted, "the IMF can continue to give Ukraine loans regardless
of what Ukraine does about its credit from Russia, which falls due on December 20.[8]
Inasmuch as Ukraine's official debt to Russia's sovereign debt fund was not to the U.S. Government,
the IMF announced its rules change as a "clarification." Its rule that no country can borrow if it
is in default to (or not seriously negotiating with) a foreign government was created in the post-1945
world, and has governed the past seventy years in which the United States Government, Treasury officials
and/or U.S. bank consortia have been party to nearly every international bailout or major loan agreement.
What the IMF rule really meant was that it would not provide credit to countries in arrears specifically
to the U.S. Government, not those of Russia or China.
Mikhail Delyagin, Director of the Institute of Globalization Problems, understood the IMF's double
standard clearly enough: "The Fund will give Kiev a new loan tranche on one condition that Ukraine
should not pay Russia a dollar under its $3 billion debt. Legally, everything will be formalized
correctly but they will oblige Ukraine to pay only to western creditors for political reasons."[9]
It remains up to the IMF board – and in the end, its managing director – whether or not to deem a
country creditworthy. The U.S. representative naturally has always blocked any leaders not beholden
to the United States.
The post-2010 loan packages to Greece are a notorious case in point. The IMF staff calculated
that Greece could not possibly pay the balance that was set to bail out foreign banks and bondholders.
Many Board members agreed (and subsequently have gone public with their whistle-blowing). Their protests
didn't matter. Dominique Strauss-Kahn backed the US-ECB position (after President Barack Obama and
Treasury secretary Tim Geithner pointed out that U.S. banks had written credit default swaps betting
that Greece could pay, and would lose money if there were a debt writedown). In 2015, Christine Lagarde
also backed the U.S.-European Central Bank hard line, against staff protests.[10]
IMF executive board member Otaviano Canuto, representing Brazil, noted that the logic that "conditions
on IMF lending to a country that fell behind on payments [was to] make sure it kept negotiating in
good faith to reach agreement with creditors."[11]
Dropping this condition, he said, would open the door for other countries to insist on a similar
waiver and avoid making serious and sincere efforts to reach payment agreement with creditor governments.
A more binding IMF rule is that it cannot lend to countries at war or use IMF credit to engage
in warfare. Article I
of its 1944-45 founding charter ban the fund from lending to a member state engaged in civil war
or at war with another member state, or for military purposes in general. But when IMF head Lagarde
made the last IMF loan to Ukraine, in spring 2015, she made a token gesture of stating that she hoped
there would be peace. But President Porochenko immediately announced that he would step up the civil
war with the Russian-speaking population in the eastern Donbass region.
The problem is that the Donbass is where most Ukrainian exports were made, mainly to Russia. That
market is being lost by the junta's belligerence toward Russia. This should have blocked Ukraine
from receiving IMF aid. Withholding IMF credit could have been a lever to force peace and adherence
to the Minsk agreements, but U.S. diplomatic pressure led that opportunity to be rejected.
The most important IMF condition being violated is that continued warfare with the East prevents
a realistic prospect of Ukraine paying back new loans. Aslund himself points to the internal contradictions
at work: Ukraine has achieved budget balance because the inflation and steep currency depreciation
has drastically eroded its pension costs. The resulting lower value of pension benefits has led to
growing opposition to Ukraine's post-Maidan junta. "Leading representatives from President Petro
Poroshenko's Bloc are insisting on massive tax cuts, but no more expenditure cuts; that would cause
a vast budget deficit that the IMF assesses at 9-10 percent of GDP, that could not possibly be financed."[12]
So how can the IMF's austerity budget be followed without a political backlash?
The IMF thus is breaking four rules: Not lending to a country that has no visible means to pay
back the loan breaks the "No More Argentinas" rule adopted after the IMF's disastrous 2001 loan.
Not lending to countries that refuse in good faith to negotiate with their official creditors goes
against the IMF's role as the major tool of the global creditors' cartel. And the IMF is now lending
to a borrower at war, indeed one that is destroying its export capacity and hence its balance-of-payments
ability to pay back the loan. Finally, the IMF is lending to a country that has little likelihood
of refuse carrying out the IMF's notorious austerity "conditionalities" on its population – without
putting down democratic opposition in a totalitarian manner. Instead of being treated as an outcast
from the international financial system, Ukraine is being welcomed and financed.
The upshot – and new basic guideline for IMF lending – is to create a new Iron Curtain splitting
the world into pro-U.S. economies going neoliberal, and all other economies, including those seeking
to maintain public investment in infrastructure, progressive taxation and what used to be viewed
as progressive capitalism. Russia and China may lend as much as they want to other governments, but
there is no international vehicle to help secure their ability to be paid back under what until now
has passed for international law. Having refused to roll back its own or ECB financial claims on
Greece, the IMF is quite willing to see repudiation of official debts owed to Russia, China or other
countries not on the list approved by the U.S. neocons who wield veto power in the IMF, World Bank
and similar global economic institutions now drawn into the U.S. orbit. Changing its rules to clear
the path for the IMF to make loans to Ukraine and other governments in default of debts owed to official
lenders is rightly seen as an escalation of America's New Cold War against Russia and also its anti-China
strategy.
Timing is everything in such ploys. Georgetown University Law professor and Treasury consultant
Anna Gelpern warned that before the "IMF staff and executive board [had] enough time to change the
policy on arrears to official creditors," Russia might use "its
notorious debt/GDP clause to accelerate the bonds at any time before December, or simply gum
up the process of reforming the IMF's arrears policy."[13]
According to this clause, if Ukraine's foreign debt rose above 60 percent of GDP, Russia's government
would have the right to demand immediate payment. But no doubt anticipating the bitter fight to come
over its attempts to collect on its loan, President Putin patiently refrained from exercising this
option. He is playing the long game, bending over backward to accommodate Ukraine rather than behaving
"odiously."
A more pressing reason deterring the United States from pressing earlier to change IMF rules was
that a waiver for Ukraine would have opened the legal floodgates for Greece to ask for a similar
waiver on having to pay the "troika" – the European Central Bank (ECB), EU commission and the IMF
itself – for the post-2010 loans that have pushed it into a worse depression than the 1930s. "Imagine
the Greek government had insisted that EU institutions accept the same haircut as the country's private
creditors," Russian finance minister Anton Siluanov asked. "The reaction in European capitals would
have been frosty. Yet this is the position now taken by Kiev with respect to Ukraine's $3 billion
eurobond held by Russia."[14]
Only after Greece capitulated to eurozone austerity was the path clear for U.S. officials to change
the IMF rules in their fight to isolate Russia. But their tactical victory has come at the cost of
changing the IMF's rules and those of the global financial system irreversibly. Other countries henceforth
may reject conditionalities, as Ukraine has done, and ask for write-downs on foreign official debts.
That was the great fear of neoliberal U.S. and Eurozone strategists last summer, after all. The
reason for smashing Greece's economy was to deter Podemos in Spain and similar movements in Italy
and Portugal from pursuing national prosperity instead of eurozone austerity. Opening the door to
such resistance by Ukraine is the blowback of America's tactic to make a short-term financial hit
on Russia while its balance of payments is down as a result of collapsing oil and gas prices.
The consequences go far beyond just the IMF. The fabric of international law itself is being torn
apart. Every action has a reaction in the Newtonian world of geopolitics. It may not be a bad thing,
to be sure, for the post-1945 global order to be broken apart by U.S. tactics against Russia, if
that is the catalyst driving other countries to defend their own economies in the legal and political
spheres. It has been U.S. neoliberals themselves who have catalyzed the emerging independent Eurasian
bloc.
Countering Russia's Ability to Collect in Britain's Law Courts
Over the past year the U.S. Treasury and State Departments have discussed ploys to block Russia
from collecting under British law, where its loans to Ukraine are registered. Reviewing the repertory
of legal excuses Ukraine might use to avoid paying Russia, Prof. Gelpern noted that it might declare
the debt "odious," made under duress or corruptly. In a paper for the Peterson Institute of International
Economics (the banking lobby in Washington) she suggested that Britain should deny Russia the use
of its courts as an additional sanction reinforcing the financial, energy, and trade sanctions to
those passed against Russia after Crimea voted to join it as protection against the ethnic cleansing
from the Right Sector, Azov Battalion and other paramilitary groups descending on the region.[15]
A kindred ploy might be for Ukraine to countersue Russia for reparations for "invading" it, for
saving Crimea and the Donbass region from the Right Sector's attempt to take over the country. Such
a ploy would seem to have little chance of success in international courts (without showing them
to be simply arms of NATO New Cold War politics), but it might delay Russia' ability to collect by
tying the loan up in a long nuisance lawsuit.
To claim that Ukraine's debt to Russia was "odious" or otherwise illegitimate, "President Petro
Poroshenko said the money was intended to ensure Yanukovych's loyalty to Moscow, and called the payment
a 'bribe,' according to an interview with Bloomberg in June this year."[16]
The legal and moral problem with such arguments is that they would apply equally to IMF and US loans.
Claiming that Russia's loan is "odious" is that this would open the floodgates for other countries
to repudiate debts taken on by dictatorships supported by IMF and U.S. lenders, headed by the many
dictatorships supported by U.S. diplomacy.
The blowback from the U.S. multi-front attempt to nullify Ukraine's debt may be used to annul
or at least write down the destructive IMF loans made on the condition that borrowers accept privatizations
favoring U.S., German and other NATO-country investors, undertake austerity programs, and buy weapons
systems such as the German submarines that Greece borrowed to pay for. As Foreign Minister Sergei
Lavrov noted: "This reform, which they are now trying to implement, designed to suit Ukraine only,
could plant a time bomb under all other IMF programs." It certainly showed the extent to which the
IMF is subordinate to U.S. aggressive New Cold Warriors: "Essentially, this reform boils down to
the following: since Ukraine is politically important – and it is only important because it is opposed
to Russia – the IMF is ready to do for Ukraine everything it has not done for anyone else, and the
situation that should 100 percent mean a default will be seen as a situation enabling the IMF to
finance Ukraine."[17]
Andrei Klimov, deputy chairman of the Committee for International Affairs at the Federation Council
(the upper house of Russia's parliament) accused the United States of playing "the role of the main
violin in the IMF while the role of the second violin is played by the European Union. These are
two basic sponsors of the Maidan – the symbol of a coup d'état in Ukraine in 2014."[18]
Putin's Counter-Strategy and the Blowback on U.S.-European and Global Relations
As noted above, having anticipated that Ukraine would seek reasons to not pay the Russian loan,
President Putin carefully refrained from exercising Russia's right to demand immediate payment when
Ukraine's foreign debt rose above 60 percent of GDP. In November he offered to defer payment if the
United States, Europe and international banks underwrote the obligation. Indeed, he even "proposed
better conditions for this restructuring than those the International Monetary Fund requested of
us." He offered "to accept a deeper restructuring with no payment this year – a payment of $1 billion
next year, $1 billion in 2017, and $1 billion in 2018." If the IMF, the United States and European
Union "are sure that Ukraine's solvency will grow," then they should "see no risk in providing guarantees
for this credit." Accordingly, he concluded "We have asked for such guarantees either from the United
States government, the European Union, or one of the big international financial institutions."
[19]
The implication, Putin pointed out, was that "If they cannot provide guarantees, this means that
they do not believe in the Ukrainian economy's future." One professor pointed out that this proposal
was in line with the fact that, "Ukraine has already received a sovereign loan guarantee from the
United States for a previous bond issue." Why couldn't the United States, Eurozone or leading commercial
banks provide a similar guarantee of Ukraine's debt to Russia – or better yet, simply lend it the
money to turn it into a loan to the IMF or US lenders?[20]
But the IMF, European Union and the United States refused to back up their happy (but nonsensical)
forecasts of Ukrainian solvency with actual guarantees. Foreign Minister Lavrov made clear just what
that rejection meant: "By having refused to guarantee Ukraine's debt as part of Russia's proposal
to restructure it, the United States effectively admitted the absence of prospects of restoring its
solvency. … By officially rejecting the proposed scheme, the United States thereby subscribed to
not seeing any prospects of Ukraine restoring its solvency."[21]
In an even more exasperated tone, Prime Minister Dmitri Medvedev explained to Russia's television
audience: "I have a feeling that they won't give us the money back because they are crooks. They
refuse to return our money and our Western partners not only refuse to help, but they also make it
difficult for us."[22]
Adding that "the international financial system is unjustly structured," he promised to "go to court.
We'll push for default on the loan and we'll push for default on all Ukrainian debts."
The basis for Russia's legal claim, he explained was that the loan
was a request from the Ukrainian Government to the Russian Government. If two governments reach
an agreement this is obviously a sovereign loan…. Surprisingly, however, international financial
organisations started saying that this is not exactly a sovereign loan. This is utter bull. Evidently,
it's just an absolutely brazen, cynical lie. … This seriously erodes trust in IMF decisions. I believe
that now there will be a lot of pleas from different borrower states to the IMF to grant them the
same terms as Ukraine. How will the IMF possibly refuse them?
And there the matter stands. As President Putin remarked regarding America's support of Al Qaeda,
Al Nusra and other ISIS allies in Syria, "Do you have any idea of what you have done?"
The Blowback
Few have calculated the degree to which America's New Cold War with Russia is creating a reaction
that is tearing up the world's linkages put in place since World War II. Beyond pulling the IMF and
World Bank tightly into U.S. unilateralist geopolitics, how long will Western Europe be willing to
forego its trade and investment interest with Russia? Germany, Italy and France already are feeling
the strains. If and when a break comes, it will not be marginal but a seismic geopolitical shift.
The oil and pipeline war designed to bypass Russian energy exports has engulfed the Near East
in anarchy for over a decade. It is flooding Europe with refugees, and also spreading terrorism to
America. In the Republican presidential debate on December 15, 2015, the leading issue was safety
from Islamic jihadists. Yet no candidate thought to explain the source of this terrorism in America's
alliance with Wahabist Saudi Arabia and Qatar, and hence with Al Qaeda and ISIS/Daish as a means
of destabilizing secular regimes seeking independence from U.S. control.
As its allies in this New Cold War, the United States has chosen fundamentalist jihadist religion
against secular regimes in Libya, Iraq, Syria, and earlier in Afghanistan and Turkey. Going back
to the original sin of CIA hubris – overthrowing the secular Iranian Prime Minister leader Mohammad
Mosaddegh in 1953 – American foreign policy has been based on the assumption that secular regimes
tend to be nationalist and resist privatization and neoliberal austerity.
Based on this fatal long-term assumption, U.S. Cold Warriors have aligned themselves not only
against secular regimes, but against democratic regimes where these seek to promote their own prosperity
and economic independence, and to resist neoliberalism in favor of maintaining their traditional
mixed public/private economy.
This is the back story of the U.S. fight to control the rest of the world. Tearing apart the IMF's
rules is only the most recent chapter. The broad drive against Russia, China and their prospective
Eurasian allies has deteriorated into tactics without a realistic understanding of how they are bringing
about precisely the kind of world they are seeking to prevent – a multilateral world.
Arena by arena, the core values of what used to be American and European social democratic ideology
are being uprooted. The Enlightenment's ideals of secular democracy and the rule of international
law applied equally to all nations, classical free market theory (of markets free from unearned income
and rent extraction by special vested interests), and public investment in infrastructure to hold
down the cost of living and doing business are to be sacrificed to a militant U.S. unilateralism
as "the indispensible nation." Standing above the rule of law and national interests, American neocons
proclaim that their nation's destiny is to wage war to prevent foreign secular democracy from acting
in ways other than submission to U.S. diplomacy. In practice, this means favoring special U.S. financial
and corporate interests that control American foreign policy.
This is not how the Enlightenment was supposed to turn out. Classical industrial capitalism a
century ago was expected to evolve into an economy of abundance. Instead, we have Pentagon capitalism,
finance capitalism deteriorating into a polarized rentier economy, and old-fashioned imperialism.
The Dollar Bloc's Financial Iron Curtain
By treating Ukraine's nullification of its official debt to Russia's Sovereign Wealth Fund as
the new norm, the IMF has blessed its default on its bond payment to Russia. President Putin and
foreign minister Lavrov have said that they will sue in British courts. But does any court exist
in the West not under the thumb of U.S. veto?
What are China and Russia to do, faced with the IMF serving as a kangaroo court whose judgments
are subject to U.S. veto power? To protect their autonomy and self-determination, they have created
alternatives to the IMF and World Bank, NATO and behind it, the dollar standard.
America's recent New Cold War maneuvering has shown that the two Bretton Woods institutions are
unreformable. It is easier to create new institutions such as the A.I.I.B. than to retrofit old and
ill-designed ones burdened with the legacy of their vested founding interests. It is easier to expand
the Shanghai Cooperation Organization than to surrender to threats from NATO.
U.S. geostrategists seem to have imagined that if they exclude Russia, China and other SCO and
Eurasian countries from the U.S.-based financial and trade system, these countries will find themselves
in the same economic box as Cuba, Iran and other countries have been isolated by sanctions. The aim
is to make countries choose between impoverishment from such exclusion, or acquiescing in U.S. neoliberal
drives to financialize their economies and impose austerity on their government sector and labor.
What is lacking from such calculations is the idea of critical mass. The United States may use
the IMF and World Bank as levers to exclude countries not in the U.S. orbit from participating in
the global trade and financial system, and it may arm-twist Europe to impose trade and financial
sanctions on Russia. But this action produces an equal and opposite reaction. That is the eternal
Newtonian law of geopolitics. The indicated countermeasure is simply for other countries to create
their own international financial organization as an alternative to the IMF, their own "aid" lending
institution to juxtapose to the U.S.-centered World Bank.
All this requires an international court to handle disputes that is free from U.S. arm-twisting
to turn international law into a kangaroo court following the dictates of Washington. The Eurasian
Economic Union now has its own court to adjudicate disputes. It may provide an alternative Judge
Griesa's New York federal court ruling in favor of vulture funds derailing Argentina's debt negotiations
and excluding it from foreign financial markets. If the London Court of International Arbitration
(under whose rules Russia's bonds issued to Ukraine are registered) permits frivolous legal claims
(called barratry in English) such as President Poroshenko has threatened in Ukrainian Parliament,
it too will become a victim of geopolitical obsolescence.
The more nakedly self-serving and geopolitical U.S. policy is – in backing radical Islamic fundamentalist
outgrowths of Al Qaeda throughout the Near East, right-wing nationalist governments in Ukraine and
the Baltics – the greater the catalytic pressure is growing for the Shanghai Cooperation Organization,
AIIB and related Eurasian institutions to break free of the post-1945 Bretton Woods system run by
the U.S. State, Defense and Treasury Departments and NATO superstructure.
The question now is whether Russia and China can hold onto the BRICS and India. So as Paul Craig
Roberts recently summarized my ideas along these lines, we are back with George Orwell's 1984
global fracture between Oceanea (the United States, Britain and its northern European NATO allies)
vs. Eurasia.
My issue with Hudson is that he tends to paint things in a "good guys/bad guys" dichotomy viz.
the IMF vs. the AIIB. Personally, I think it's quite positive that the international sovereign
finance institutions will now be more international and less unipolar, but his scenario where
Nations would mint their own money and hold each other's debt in their international
reserves instead of borrowing or holding dollars and subordinating their financial planning
to the IMF and U.S. Treasury with their demands for monetary bloodletting and austerity for
debtor countries.
is rather pie-in-the sky. What reason do we have to believe that concentrated Chinese capital
would somehow be more benevolent than our current overlords? Oh because AIIB has the word "infrastructure"
in its title (just as the Interamerican Development Bank is all about development) /sarc.
Furthermore, if US planners had half a clue about economics, they would be jumping for joy
that the AIIB and the CIPS will finally help release them (eventually) from the burden of having
the USD as the global reserve currency, thus relieving the US of the albatross of having to ship
its internal demand to China and other net exporters.
All in all, yes AIIB should be positive, but as Hudson himself points out, this is not so much
about economics as it is geopolitics. The world should tread with the utmost caution.
I think his main point is not so much about economics or geopolitics, it's about the rule of
law, specifically international law and how it applies to the debt collection brokered between
counties.
China and Russia harbored the fantasy that would be allowed redress in the Western
Courts where international law is metered out. They are now no longer under that delusion.
Even if they come up with a lending facility, the West will thwart their ability to collect
on those debts at every turn by simply declaring those debts null and void and extending new funds
using the infrastructure build by the bad (Russian/Chinese) debt as collateral. The thirst for
power and profit will always be with us, but now it will not be tempered by any international
order under the rule of law.
China is learning the hard way how the game is played. For example, they're discovering that
much of the tens of billions in no-strings attached loans given to Africa will not provide the
returns initially thought (even accounting for massive corruption on all sides), which is why
they have been reduced for the first time in a decade this past year.
Don't see how "economics" and "social" can be de-linked from "politics"…understanding the limits
of "local" may provide an awareness of the "quid pro quo" of extending, direction of extension,
and what defines (in/inter) "dependency"…how sacrifice is "shared" or imposed, and how "prosperity"
is concentrated or distributed…
It's not Hudson but the US that has simplified the entire world situation into "good guys
vs. bad guys", a policy enshrined in Rumsfeld's statement "you're either with us or you're against
us".
It's like a playground with one big bully and lots of kids running scared, now a second bully
appears and they all have to ask themselves whether Bully #2 will be nicer to them, in this case
it appears Bully #2 is saying he won't tell them how to run their lives or steal their lunch money.
Post-comet in 2000 when everything started going to hell the worst casualty has been the rule
of law, from hanging chads through to the Patriot Act, death by a thousand cuts of the Constitution,
unprosecuted war crimes, unprosecuted financial crimes, and now the very fabric of international
law being rent apart. I'm reminded of the Hunter Thompson scene where he has an expired driver's
license and a cop pulls him over, he has two choices, hand over the license and get busted, or
drive away and get busted… so he comes up with a third choice: he blows his nose all over the
license and hands it over to the cop. The equivalent of Bully #1 taking the only soccer ball on
the playground and kicking it over the fence so the game is screwed up for everybody, Pepe's "Empire
of Chaos" indeed.
1)Western economies depend on ocean transport…if chinese or ruskies destroy it, USA-EU will
be bankrupt in weeks..USA-EU are consumers and not producers..their exports to rest of world are
tiny..So,their position is very weak at this point
2)The asian countries like china-india will be forced to join hands under joint attack by US financial
system and islamic jihadists..Russia and china,former enemies,are now friends…who could have imagines
it?
Russo-chinese-iranian alliance is huge failure of US foreign policies
3)Using islamic terrorists and islamic countries like turkey-saudi arabia-pakistan-indonesia-egypt
is not going to work for USA because muslims think USA as enemy no.1…
4)A military superiority can not guarantee permanent -everlasting victory against too many opponents
What i see here is USA has made entire islamic world their enemy,alongwith china and russia
In case of real war,USA position will be very weak
This is an amazing article. Bravo!
Now it's becoming clear just what Margaret Thatcher meant when she told everyone that there was
no alternative to neoliberalism.
Thank you for continuing to mark the historical specifics of the finance/legal wing of geopolitical
conflict, and the perverse failings of Full Spectrum Dominance.
The Oceana/Eurasia dichotomy is a dangerous frame of reference. It essentially contrasts the
transport efficiencies of water to the solid defensive capacity of the frozen steppes. But when
things get bloody, they usually crack along language lines. Not only as a proxy for migrations
of the gene, but also world-views. How horse-people see things, what metaphors they use, are very
different than how cow-people categorize the world.
This highlights that Russia is continuing to operate within the language and legal framework
of the Indo-European languages. In other words (!), it is a fight between the U.S. and Russia
for European alliances. If this is the case, then the alliance of NATO with Turkic and Arabic
lines is of convenience, in that they are not partners but proxies. Europe is faced with the habit
of the U.S. in saying, Let's you and him fight. But there's an oceans difference between the U.S.
and European interests.
It also means that Russia and China are being pushed together by western exclusion, like drops
of oil on the water. I maintain that Russia has doubled down on global warming, to open up northern
sea routes and make the steppes arable. China is already a sea-power, but its massive population
will need lebensraum as the fossil-fuel support for the energy needs of megapoli decay. The mountains
are a formidable barrier for them to take the steppes by force.
The question for the rest of the world then becomes, who do you want to have as a friend in
a hundred years. Do you bet on the Wizards of Wall Street, with their Magic Money Wand of Fiat?
Or do you think Russia will ground-n-pound the fairy dust into the mud?
what is left unsaid is the choices Russia then faces once their legal options play out
and the uneven playing field is fully exposed. Do they not then have a historically justifiable
basis for declaring war?
'The Russian and Chinese governments are investing in neighboring economies on terms that
cement Eurasian economic integration.'
Whereas the U.S. is 'investing' in new military bases to cement U.S. global domination.
Guess which model actually benefits local living standards, and 'wins hearts and minds'?
Global domination as a policy goal bankrupted the USSR. It's not working for the USSA either,
as the U.S. middle class (once the envy of the world) visibly sinks into pauperization.
Thus the veracity of Michael Hudson's conclusion that 'when a break comes, it will not be marginal
but a seismic geopolitical shift.'
I get the same thrill reading Hudson the religiously devout must experience reading their bibles
or Korans – a glimpse of 'truth' as best it can be known. My first encounter was this interview
in Counterpunch:
An Interview with Michael Hudson, author of Super Imperialism That led directly to "Super
Imperialism" (and just about every book since its publication). After reading it, I was left with
the uneasy feeling that no good would come from an international monetary system that allowed
any one nation to pay its way in the world by creating money 'out of thin air' i.e. as sovereign
and private debt or, almost the same thing, Federal Reserve Notes.
The race to the bottom of off-shored jobs and industries freed from all environmental restrictions,
AKA 'globalization', had started to really kick in but it was just before Operation Iraqi Liberation
(get it?). Fundamentally, it wasn't war for oil, of course, but a war to preserve the Dollar Standard.
Recycling petrodollars bought a little time after the 1971 collapse of Bretton Woods. But with
the world's treasuries filling up with US dollars and debt, the product of the Congressional-military-industrial-complex
running wild and more recently the U.S. 0.01% successfully evading almost all forms of taxation,
some kind of control more basic than controlling the world's access to money (which basically
means credit) was required.
When people like Alan Greenspan (pretend to) come clean, you really want to look twice:
THOUGH it was not understood a century ago, and though as yet the applications of the knowledge
to the economics of life are not generally realized, life in its physical aspect is fundamentally
a struggle for energy, in which discovery after discovery brings life into new relations with
the original source.
Frederick Soddy, WEALTH, VIRTUAL WEALTH AND DEBT, 2nd edition, p. 49
The world can live without American dollars, especially these days when the U.S. no longer makes
much the world needs or can afford but most obviously because it already possesses more of them
than can ever be redeemed ('debt that can't be repaid and won't be') What it can't live without
is ENERGY.
So long as most of that energy needs to be pumped out of the ground, the nation that ultimately
controls access to the pumps – or to the distribution networks required to deliver it to the ultimate
user – controls the world. This is most likely why Reagan promptly dismantled Jimmy Carter's White
House solar panels. It is why the US and its European vassals have been dragging their feet for
a half-century on the development of renewable energy sources and the electrification of transportation.
It is why the banks and Wall Street will stand solidly behind the various electrical utilities
efforts to discourage the development of any alternative energy sources from which their executives
and shareholders can not extract the last pint of blood or has Hudson more politely calls it 'economic
rent'.
P.S. Hudson seems to have a dangerous monopoly on economic truth these days. Is there anyone
else who even comes close?
"... Ukraine remains committed ... to negotiating in good faith a consensual restructuring of the December 2015 Eurobonds, Nonsense, they are nothing but thieves in suits; Fascist politicians stealing from the taxpayers in the USA, EU, Russia and the Ukraine. You supporters of modern Fascism are disgusting little NeoCon trolls, yes you are! ..."
"... Under this IMF restructuring deal with the Ukraine, the oligarchs mandated that Monsanto GMO comes in. Now the once fertile farms will grow poisoned food. ... They also mandated hydraulic fracking rights to Exxon and BP. Now the aquifers will be poisoned. ... Moreover, the IMF social chapter destroys family values and requires that corrosive gay propaganda be thrust into the children's minds. ... Welcome to the new Globalist Business Model. ..."
"... The Ukraine is like a dying carcass. ... The EU jackals are howling, the IMF vultures are circling, and the NATO hyenas are picking the flesh off of the bones. ..."
"... Ukraine's Finance Minister, who promised in the above Reuters article today Dec 18, 2015, to talk in good faith with the Russian Federation about their $3 Billion Loan due and payable on Dec 15, as of today is in Default on that $3 Billion Loan , and therefore isn't eligible to receive any Loan from the IMF, headed by Chief Lagarde who must now stand trial for an improper loan of $434 Million . ..."
"... Good faith? They actually mean bait and switch ..."
"... The deadbeat American lackeys in Kiev have no intention of paying their debts to Russia because Washington DC is run by thieves and immoral people. You know this is true. ..."
"... Meanwhile Ukraine has restricted air travel, cutoff Crimea, and fought efforts to grant autonomy to Russian-speaking regions. With unpaid debt, the country still stokes war with Russia after being warned by Mr. Kerry to stop. ..."
"Ukraine remains committed ... to negotiating in good faith a consensual restructuring of
the December 2015 Eurobonds," Nonsense, they are nothing but thieves in suits; Fascist
politicians stealing from the taxpayers in the USA, EU, Russia and the Ukraine. You supporters
of modern Fascism are disgusting little NeoCon trolls, yes you are!
Robert
This is the new Globalist Business Model.
Overthrow a sovereign country by revolution or outright bombing campaign.
Appoint oligarchs to run it and fascists to rule the streets.
Rack the country with unpardonable debt.
Bring in the IMF and other global banks to 'restructure' the economy.
Loot the country's resources by selling off the infrastructure for pennies on the
dollar.
Impose huge austerity programs. ... Cuts pensions in half and double basic living costs.
Finally, colonialize the citizens under multi-national corporate rule where the people
have little or no say.
Under this IMF restructuring deal with the Ukraine, the oligarchs mandated that Monsanto
GMO comes in. Now the once fertile farms will grow poisoned food. ... They also mandated
hydraulic fracking rights to Exxon and BP. Now the aquifers will be poisoned. ... Moreover,
the IMF social chapter destroys family values and requires that corrosive gay propaganda be
thrust into the children's minds. ... Welcome to the new Globalist Business Model.
The Ukraine is like a dying carcass. ... The EU jackals are howling, the IMF vultures are
circling, and the NATO hyenas are picking the flesh off of the bones.
Algis
Russia needs to take payment out of their proverbial hides. No one consider it unjustified
except a few brainwashed Americans and of course the immoral and corrupt ruling class of the
Empire!
new_federali...
Ukraine's Finance Minister, who promised in the above Reuters article today Dec 18, 2015,
to talk in good faith with the Russian Federation about their $3 Billion Loan due and payable
on Dec 15, as of today is in Default on that $3 Billion Loan , and therefore isn't eligible to
receive any Loan from the IMF, headed by Chief Lagarde who must now stand trial for an
improper loan of $434 Million .
Therefore, Gold did achieve an all-important triple bottom at $1,050 per ounce this week,
and is now in a furious rally up $15 to $1,065 per ounce as DXY (U.S. Dollar Index) falls
sharply today due to utter failure of U.S.- led IMF to rescue Ukraine from Financial Collapse
today -- Thus Gold will now rally sharply through at least Feb 2016 when Gold will be at $1,500
per ounce, and ultimately going to new all-time highs above $2,000 per ounce -- Dec 18, 2015 at
11:53 a.m. PST.
Commenter
Good faith? They actually mean bait and switch
Algis
The deadbeat American lackeys in Kiev have no intention of paying their debts to Russia
because Washington DC is run by thieves and immoral people. You know this is true.
RonP
Meanwhile Ukraine has restricted air travel, cutoff Crimea, and fought efforts to grant
autonomy to Russian-speaking regions. With unpaid debt, the country still stokes war with
Russia after being warned by Mr. Kerry to stop.
"... Any serious discussion of Fed policy would note that the banking industry appears to have a grossly disproportionate say in the country's monetary policy. ..."
But what is even more striking is the Post's ability to
treat the Fed a neutral party when the evidence is so
overwhelming in the opposite direction. The majority of
the Fed's 12 district bank presidents have long been
pushing for a rate hike. While there are some doves among
this group, most notably Charles Evans, the Chicago bank
president, and Narayana Kocherlakota, the departing
president of the Minneapolis bank, most of this group has
publicly pushed for higher rate hikes for some time. By
contrast, the governors who are appointed through the
democratic process, have been far more cautious about
raising rates.
It should raise serious concerns that the bank
presidents, who are appointed through a process dominated
by the banking industry, has such a different perspective
on the best path forward for monetary policy. With only
five of the seven governor slots currently filled, there
are as many presidents with voting seats on the Fed's Open
Market Committee as governors. In total, the governors are
outnumbered at meetings by a ratio of twelve to five.
Any serious discussion of Fed policy would note that
the banking industry appears to have a grossly
disproportionate say in the country's monetary policy.
Furthermore, it seems determined to use that influence to
push the Fed on a path that slows growth and reduces the
rate of job creation. The Post somehow missed this story
or at least would prefer that the rest of us not take
notice.
Looks like growth of financial sector represents direct threat to the society
Notable quotes:
"... Perhaps the financialization of the economy and rising inequality leads to a corruption of the political process which leads to monetary, currency and fiscal policy such that labor markets are loose and inflation is low. ..."
"... Growth of the non-financial-sector == growth in productivity ..."
"... In complex subject matters, even the most competent person joining a company has to become familiar with the details of the products, the industry niche, the processes and professional/personal relationships in the company or industry, etc. All these are not really teachable and require between months and years in the job. This represents a significant sunk cost. Sometimes (actually rather often) experience within the niche/industry is in a degree portable between companies, but some company still had to employ enough people to build this experience, and it cannot be readily bought by bringing in however competent freshers. ..."
Working Paper: : In the years since 1980, there has been a well-documented upward redistribution
of income. While there are some differences by methodology and the precise years chosen, the top
one percent of households have seen their income share roughly double from 10 percent in 1980
to 20 percent in the second decade of the 21st century. As a result of this upward redistribution,
most workers have seen little improvement in living standards from the productivity gains over
this period.
This paper argues that the bulk of this upward redistribution comes from the growth
of rents in the economy in four major areas: patent and copyright protection, the financial sector,
the pay of CEOs and other top executives, and protectionist measures that have boosted the pay
of doctors and other highly educated professionals. The argument on rents is important because,
if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise
in inequality, as for example argued by Thomas Piketty.
"...the growth of finance capitalism was what would kill capitalism off..."
"Financialization" is a short-cut terminology that in full is term either "financialization
of non-financial firms" or "financialization of the means of production." In either case it leads
to consolidation of firms, outsourcing, downsizing, and offshoring to reduce work force and wages
and increase rents.
Consolidation, the alpha and omega of financialization can only be executed with very liquid
financial markets, big investment banks to back necessary leverage to make the proffers, and an
acute capital gains tax preference relative to dividends and interest earnings, the grease to
liquidity.
It takes big finance to do "financialization" and it takes "financialization" to extract big
rents while maintaining low wages.
Finance sector as percent of US GDP, 1860-present: the growth of the rentier economy
[graph]
Financialization is a term sometimes used in discussions of financial capitalism which developed
over recent decades, in which financial leverage tended to override capital (equity) and financial
markets tended to dominate over the traditional industrial economy and agricultural economics.
Financialization is a term that describes an economic system or process that attempts to reduce
all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either
into a financial instrument or a derivative of a financial instrument. The original intent of
financialization is to be able to reduce any work-product or service to an exchangeable financial
instrument... Financialization also makes economic rents possible...financial leverage tended
to override capital (equity) and financial markets tended to dominate over the traditional industrial
economy and agricultural economics...
Companies are not able to invest in new physical capital equipment or buildings because they
are obliged to use their operating revenue to pay their bankers and bondholders, as well as junk-bond
holders. This is what I mean when I say that the economy is becoming financialized. Its aim is
not to provide tangible capital formation or rising living standards, but to generate interest,
financial fees for underwriting mergers and acquisitions, and capital gains that accrue mainly
to insiders, headed by upper management and large financial institutions. The upshot is that the
traditional business cycle has been overshadowed by a secular increase in debt.
Instead of labor earning more, hourly earnings have declined in real terms. There has been
a drop in net disposable income after paying taxes and withholding "forced saving" for social
Security and medical insurance, pension-fund contributions and–most serious of all–debt service
on credit cards, bank loans, mortgage loans, student loans, auto loans, home insurance premiums,
life insurance, private medical insurance and other FIRE-sector charges. ... This diverts spending
away from goods and services.
In the United States, probably more money has been made through the appreciation of real estate
than in any other way. What are the long-term consequences if an increasing percentage of savings
and wealth, as it now seems, is used to inflate the prices of already existing assets - real estate
and stocks - instead of to create new production and innovation?
Your graph shows something I've been meaning to suggest for a while. Take a look at the last time
that the financial sector share of GDP rose. The late 1920's. Which was followed by the Great
Depression which has similar causes as our Great Recession. Here is my observation.
Give that Wall Street clowns a huge increase in our national income and we don't get more services
from them. What we get is screwed on the grandest of scales.
BTW - there is a simple causal relationship that explains both the rise in the share of financial
sector income/GDP and the massive collapses of the economy (1929 and 2007). It is called stupid
financial deregulation. First we see the megabanks and Wall Street milking the system for all
its worth and when their unhanded and often secretive risk taking falls apart - the rest of bear
the brunt of the damage.
Which is why this election is crucial. Elect a Republican and we repeat this mistake again.
Elect a real progressive and we can put in place the types of financial reforms FDR was known
for.
" and it takes "financialization" to extract big rents while maintaining low wages."
It takes governmental macro policy to maintain loose labor markets and low wages. Perhaps
the financialization of the economy and rising inequality leads to a corruption of the political
process which leads to monetary, currency and fiscal policy such that labor markets are loose
and inflation is low.
[Anne gave you FIRE sector profits as a share of GDP while this gives FIRE sector profits as a
share of total corporate profits.]
*
[Smoking gun excerpt:]
"...The financial system has grown rapidly since the early 1980s. In the 1950s, the financial
sector accounted for about 3 percent of U.S. gross domestic product. Today, that figure has more
than doubled, to 6.5 percent. The sector's yearly rate of growth doubled after 1980, rising to
a peak of 7.5 percent of GDP in 2006. As finance has grown in relative size it has also grown
disproportionately more profitable. In 1950, financial-sector profits were about 8 percent of
overall U.S. profits-meaning all the profit earned by any kind of business enterprise in the country.
By the 2000s, they ranged between 20 and 40 percent...
If you want to know what happened to economic equality in this country, one word will explain
a lot of it: financialization. That term refers to an increase in the size, scope, and power of
the financial sector-the people and firms that manage money and underwrite stocks, bonds, derivatives,
and other securities-relative to the rest of the economy.
The financialization revolution over the past thirty-five years has moved us toward greater
inequality in three distinct ways. The first involves moving a larger share of the total national
wealth into the hands of the financial sector. The second involves concentrating on activities
that are of questionable value, or even detrimental to the economy as a whole. And finally, finance
has increased inequality by convincing corporate executives and asset managers that corporations
must be judged not by the quality of their products and workforce but by one thing only: immediate
income paid to shareholders.
The financial system has grown rapidly since the early 1980s. In the 1950s, the financial sector
accounted for about 3 percent of U.S. gross domestic product. Today, that figure has more than
doubled, to 6.5 percent. The sector's yearly rate of growth doubled after 1980, rising to a peak
of 7.5 percent of GDP in 2006. As finance has grown in relative size it has also grown disproportionately
more profitable. In 1950, financial-sector profits were about 8 percent of overall U.S. profits-meaning
all the profit earned by any kind of business enterprise in the country. By the 2000s, they ranged
between 20 and 40 percent. This isn't just the decline of profits in other industries, either.
Between 1980 and 2006, while GDP increased five times, financial-sector profits increased sixteen
times over. While financial and nonfinancial profits grew at roughly the same rate before 1980,
between 1980 and 2006 nonfinancial profits grew seven times while financial profits grew sixteen
times.
This trend has continued even after the financial crisis of 2008 and subsequent financial reforms,
including the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Financial profits
in 2012 were 24 percent of total profits, while the financial sector's share of GDP was 6.8 percent.
These numbers are lower than the high points of the mid-2000s; but, compared to the years before
1980, they are remarkably high.
This explosion of finance has generated greater inequality. To begin with, the share of the
total workforce employed in the financial sector has barely budged, much less grown at a rate
equivalent to the size and profitability of the sector as a whole. That means that these swollen
profits are flowing to a small sliver of the population: those employed in finance. And financiers,
in turn, have become substantially more prominent among the top 1 percent. Recent work by the
economists Jon Bakija, Adam Cole, and Bradley T. Heim found that the percentage of those in the
top 1 percent of income working in finance nearly doubled between 1979 and 2005, from 7.7 percent
to 13.9 percent.
If the economy had become far more productive as a result of these changes, they could have
been worthwhile. But the evidence shows it did not. Economist Thomas Philippon found that financial
services themselves have become less, not more, efficient over this time period. The unit cost
of financial services, or the percentage of assets it costs to produce all financial issuances,
was relatively high at the dawn of the twentieth century, but declined to below 2 percent between
1901 and 1960. However, it has increased since the 1960s, and is back to levels seen at the early
twentieth century. Whatever finance is doing, it isn't doing it more cheaply.
In fact, the second damaging trend is that financial institutions began to concentrate more
and more on activities that are worrisome at best and destructive at worst. Harvard Business School
professors Robin Greenwood and David Scharfstein argue that between 1980 and 2007 the growth in
financial-industry revenues came from two things: asset management and loan origination. Fees
associated either with asset management or with household credit in particular were responsible
for 74 percent of the growth in financial-sector output over that period.
The asset management portion reflects the explosion of mutual funds, which increased from $134
billion in assets in 1980 to $12 trillion in 2007. Much of it also comes from "alternative investment
vehicles" like hedge funds and private equity. Over this time, the fee rate for mutual funds fell,
but fees associated with alternative investment vehicles exploded. This is, in essence, money
for nothing-there is little evidence that hedge funds actually perform better than the market
over time. And, unlike mutual funds, alternative investment funds do not fully disclose their
practices and fees publicly.
Beginning in 1980 and continuing today, banks generate less and less of their income from interest
on loans. Instead, they rely on fees, from either consumers or borrowers. Fees associated with
household credit grew from 1.1 percent of GDP in 1980 to 3.4 percent in 2007. As part of the unregulated
shadow banking sector that took over the financial sector, banks are less and less in the business
of holding loans and more and more concerned with packaging them and selling them off. Instead
of holding loans on their books, banks originate loans to sell off and distribute into this new
type of banking sector.
Again, if this "originate-to-distribute" model created value for society, it could be a worthwhile
practice. But, in fact, this model introduced huge opportunities for fraud throughout the lending
process. Loans-such as "securitized mortgages" made up of pledges of the income stream from subprime
mortgage loans-were passed along a chain of buyers until someone far away held the ultimate risk.
Bankers who originated the mortgages received significant commissions, with virtually no accountability
or oversight. The incentive, in fact, was perverse: find the worst loans with the biggest fees
instead of properly screening for whether the loans would be any good for investors.
The same model made it difficult, if not impossible, to renegotiate bad mortgages when the
system collapsed. Those tasked with tackling bad mortgages on behalf of investors had their own
conflicts of interests, and found themselves profiting while loans struggled. This process created
bad debts that could never be paid, and blocked attempts to try and rework them after the fact.
The resulting pool of bad debt has been a drag on the economy ever since, giving us the fall in
median wages of the Great Recession and the sluggish recovery we still live with.
And of course it's been an epic disaster for the borrowers themselves. Many of them, we now
know, were moderate- and lower-income families who were in no financial position to borrow as
much as they did, especially under such predatory terms and with such high fees. Collapsing home
prices and the inability to renegotiate their underwater mortgages stripped these folks of whatever
savings they had and left them in deep debt, widening even further the gulf of inequality in this
country.
Moreover, financialization isn't just confined to the financial sector itself. It's also ultimately
about who controls, guides, and benefits from our economy as a whole. And here's the last big
change: the "shareholder revolution," started in the 1980s and continuing to this very day, has
fundamentally transformed the way our economy functions in favor of wealth owners.
To understand this change, compare two eras at General Electric. This is how business professor
Gerald Davis describes the perspective of Owen Young, who was CEO of GE almost straight through
from 1922 to 1945: "[S]tockholders are confined to a maximum return equivalent to a risk premium.
The remaining profit stays in the enterprise, is paid out in higher wages, or is passed on to
the customer." Davis contrasts that ethos with that of Jack Welch, CEO from 1981 to 2001; Welch,
Davis says, believed in "the shareholder as king-the residual claimant, entitled to the [whole]
pot of earnings."
This change had dramatic consequences. Economist J. W. Mason found that, before the 1980s,
firms tended to borrow funds in order to fuel investment. Since 1980, that link has been broken.
Now when firms borrow, they tend to use the money to fund dividends or buy back stocks. Indeed,
even during the height of the housing boom, Mason notes, "corporations were paying out more than
100 percent of their cash flow to shareholders."
This lack of investment is obviously holding back our recovery. Productive investment remains
low, and even extraordinary action by the Federal Reserve to make investments more profitable
by keeping interest rates low has not been able to counteract the general corporate presumption
that this money should go to shareholders. There is thus less innovation, less risk taking, and
ultimately less growth. One of the reasons this revolution was engineered in the 1980s was to
put a check on what kinds of investments CEOs could make, and one of those investments was wage
growth. Finance has now won the battle against wage earners: corporations today are reluctant
to raise wages even as the economy slowly starts to recover. This keeps the economy perpetually
sluggish by retarding consumer demand, while also increasing inequality.
How can these changes be challenged? The first thing we must understand is the scope of the
change. As Mason writes, the changes have been intellectual, legal, and institutional. At the
intellectual level, academic research and conventional wisdom among economists and policymakers
coalesced around the ideas that maximizing returns to shareholders is the only goal of a corporation,
and that the financial markets were always right. At the legal level, laws regulating finance
at the state level were overturned by the Supreme Court or preempted by federal regulators, and
antitrust regulations were gutted by the Reagan administration and not taken up again.
At the institutional level, deregulation over several administrations led to a massive concentration
of the financial sector into fewer, richer firms. As financial expertise became more prestigious
than industry-specific knowledge, CEOs no longer came from within the firms they represented but
instead from other firms or from Wall Street; their pay was aligned through stock options, which
naturally turned their focus toward maximizing stock prices. The intellectual and institutional
transformation was part of an overwhelming ideological change: the health and strength of the
economy became identified solely with the profitability of the financial markets.
This was a bold revolution, and any program that seeks to change it has to be just as bold
intellectually. Such a program will also require legal and institutional changes, ones that go
beyond making sure that financial firms can fail without destroying the economy. Dodd-Frank can
be thought of as a reaction against the worst excesses of the financial sector at the height of
the housing bubble, and as a line of defense against future financial panics. Many parts of it
are doing yeoman's work in curtailing the financial sector's abuses, especially in terms of protecting
consumers from fraud and bringing some transparency to the Wild West of the derivatives markets.
But the scope of the law is too limited to roll back these larger changes.
One provision of Dodd-Frank, however, suggests a way forward. At the urging of the AFL-CIO,
Dodd-Frank empowered the Securities and Exchange Commission to examine the activities of private
equity firms on behalf of their investors. At around $3.5 trillion, private equity is a massive
market with serious consequences for the economy as a whole. On its first pass, the SEC found
extensive abuses. Andrew Bowden, the director of the SEC's examinations office, stated that the
agency found "what we believe are violations of law or material weaknesses in controls over 50
percent of the time."
Lawmakers could require private equity and hedge funds to standardize their disclosures of
fees and holdings, as is currently the case for mutual funds. The decline in fees for mutual funds
noted above didn't just happen by itself; it happened because the law structured the market for
actual transparency and price competition. This will need to happen again for the broader financial
sector.
But the most important change will be intellectual: we must come to understand our economy
not as simply a vehicle for capital owners, but rather as the creation of all of us, a common
endeavor that creates space for innovation, risk taking, and a stronger workforce. This change
will be difficult, as we will have to alter how we approach the economy as a whole. Our wealth
and companies can't just be strip-mined for a small sliver of capital holders; we'll need to bring
the corporation back to the public realm. But without it, we will remain trapped inside an economy
that only works for a select few.
[Whew!]
Puerto Barato said in reply to RC AKA Darryl, Ron,
"3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5"
~~RC AKA Darryl, Ron ~
Growth of the non-financial-sector == growth in productivity
Growth of the financial-sector == growth in upward transfer of wealth
Ostensibly financial-sector is there to protect your money from being eaten up by inflation.
Closer inspection shows that the prevention of *eaten up* is by the method of rent collection.
Accountants handle this analysis poorly, but you can see what is happening. Boiling it down
to the bottom line you can easily see that wiping out the financial sector is the remedy to the
Piketty.
Hell! Financial sector wiped itself out in 008. Problem was that the GSE and administration
brought the zombie back to life then put the vampire back at our throats. What was the precipitating
factor that snagged the financial sector without warning?
Unexpected
deflation
!
Gimme some
of that
pgl said in reply to djb...
People like Brad DeLong have noted this for a while. Twice as many people making twice as much
money per person. And their true value to us - not a bit more than it was back in the 1940's.
Piketty looks at centuries of data from all over the world and concludes that capitalism has
a long-run bias towards income concentration. Baker looks at 35 years of data in one country and
concludes that Piketty is wrong. Um...?
A little more generously, what Baker actually writes is:
"The argument on rents is important because, if correct, it means that there is nothing intrinsic
to capitalism that led to **this** rapid rise in inequality, as for example argued by Thomas Piketty."
(emphasis added)
But Piketty has always been very explicit that the recent rise in US income inequality is anomalous
-- driven primarily by rising inequality in the distribution of labor income, and only secondarily
by any shift from labor to capital income.
So perhaps Baker is "correctly" refuting Straw Thomas Piketty. Which I suppose is better than
just being obviously wrong. Maybe.
tew said...
Some simple math shows that this assertion is false "As a result of this upward redistribution,
most workers have seen little improvement in living standards" unless you think an apprx. 60%
in per-capita real income (expressed as GDP) among the 99% is "little improvement".
Real GDP 2015 / Real GDP 1980 = 2.57 (Source: FRED)
If the income share of the 1% shifted from 10% to 20% then The 1%' real GDP component went up
410% while that of The 99% went up 130%. Accounting for a population increase of about 41% brings
those numbers to a 265% increase and a 62% increase.
Certainly a very unequal distribution of the productivity gains but hard to call "little".
I believe the truth of the statement is revealed when you look at the Top 5% vs. the other
95%.
cm said in reply to tew...
For most "working people", their raises are quickly eaten up by increases in housing/rental,
food, local services, and other nondiscretionary costs. Sure, you can buy more and better imported
consumer electronics per dollar, but you have to pay the rent/mortgage every months, how often
do you buy a new flat screen TV? In a high-cost metro, a big ass TV will easily cost less than
a single monthly rent (and probably less than your annual cable bill that you need to actually
watch TV).
pgl said in reply to tew...
Are you trying to be the champion of the 1%? Sorry dude but Greg Mankiw beat you to this.
anne said...
In the years since 1980, there has been a well-documented upward redistribution of income.
While there are some differences by methodology and the precise years chosen, the top one percent
of households have seen their income share roughly double from 10 percent in 1980 to 20 percent
in the second decade of the 21st century. As a result of this upward redistribution, most workers
have seen little improvement in living standards from the productivity gains over this period....
Between 1948 and 1980, real median family income increased by 110.2%, while between 1980 and 2014
real median family income increased by a mere 15.8%.
cm said...
"protectionist measures that have boosted the pay of doctors and other highly educated
professionals"
Protectionist measures (largely of the variety that foreign credentials are not recognized)
apply to doctors and similar accredited occupations considered to be of some importance, but certainly
much less so to "highly educated professionals" in tech, where the protectionism is limited to
annual quotas for some categories of new workers imported into the country and requiring companies
to pay above a certain wage rate for work visa holders in jobs claimed to have high skills requirements.
A little mentioned but significant factor for growing wages in "highly skilled" jobs is that
the level of foundational and generic domain skills is a necessity, but is not all the value the
individual brings to the company. In complex subject matters, even the most competent person
joining a company has to become familiar with the details of the products, the industry niche,
the processes and professional/personal relationships in the company or industry, etc. All these
are not really teachable and require between months and years in the job. This represents a significant
sunk cost. Sometimes (actually rather often) experience within the niche/industry is in a degree
portable between companies, but some company still had to employ enough people to build this experience,
and it cannot be readily bought by bringing in however competent freshers.
This applies less so e.g. in medicine. There are of course many heavily specialized disciplines,
but a top flight brain or internal organ surgeon can essentially work on any person. The variation
in the subject matter is large and complex, but much more static than in technology.
That's not to knock down the skill of medical staff in any way (or anybody else who does a
job that is not trivial, and that's true for many jobs). But specialization vs. genericity follow
a different pattern than in tech.
Another example, the legal profession. There are similar principles that carry across, with
a lot of the specialization happening along different legislation, case law, etc., specific to
the jurisdiction and/or domain being litigated.
"... when the Big Banks were caught and convicted of conspiring to manipulate the $500 trillion, LIBOR debt market ..."
"... when the Big Banks were caught and convicted of conspiring to launder trillions for the global drug cartels and "terrorist" entities, despite the supposed "wars" the U.S. claims to be fighting against drugs and terrorism ..."
"... The Vampire Squid Firmly Attached To The Face Of Humanity ..."
"... As far as I can gather, the World Bank and the IMF are apart of the very same Cartel that own/control the Central Banks. ..."
Then we have the confessions of the criminals. A full one-quarter of Wall Street's and London's
senior banking executives
freely admit that crime is a way of life
in their industry -- organized crime. Even in our justice system (or what remains of it), once armed
with confessions, the principle of "innocent until proven guilty" no longer applies – the guilt is
conceded.
The Big Banks manipulate credit default swaps to perpetrate economic terrorism against other nations
in the world, where they literally destroy the economies of those victim-nations. It used to be a
theory, but now the proof is finally emerging. You heard it here first.
LawsofPhysics
So what? Has any of the bank management/leaders gone to prison and lost all their wealth?
"when the Big Banks were
caught and convicted of conspiring to manipulate the $500 trillion, LIBOR
debt market"
(Citicorp, JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Plc
agreed to plead guilty to felony charges of conspiring to manipulate the price of U.S. dollars
and euros)
"when the Big Banks were
caught and convicted of conspiring to launder trillions for the global drug
cartels and "terrorist" entities, despite the supposed "wars" the U.S. claims to be fighting against
drugs and terrorism"
(Wells Fargo and JPMorgan)
and of course, The Vampire Squid Firmly Attached To The Face Of Humanity,
Goldman Sachs, The Great Destroyer
commoncourtesy
Fancy-free please will you explain further.
As far as I can gather, the World Bank and the IMF are apart of the very same Cartel that
own/control the Central Banks. All are controlled by the BIS who is run/controlled by pretty
much all the same criminals on a merry-go-round. Throw in the Vatican, The Crown (BAR) Temple
- The City of London, Washington DC, the Rothschild's et al, puppet Governments (and their military)
on the same payroll and the world is pretty much screwed.
Who are the Board of Governors you are talking about?
Who is this coalition?
Please name names.
Can you vouch for their credibility or are they part of the corrupt cartel?
There is far TOO MUCH SECRECY going on.
If everything was more transparent, out of the shadows and open the world would not be in the
state is in today.
Closed dealings, complexity and behind the curtain negotiations promote corruption.
How can justice be served when most public jurors would not be able to understand the fraudulent
accounting practices being utilised?
What is the TRUTH?
andrewp111
A big load of bullshit. The US has its own currency and that currency is backed by military
power. Greece is a subordinate vassal state of the EU. There is no comparison between the two.
"... Can you list all of the pro- or anti- Wall Street reforms and actions Bill Clinton performed as President including nominating Alan Greenspan as head regulator? Cutting the capital gains tax? Are you aware of Greenspans record? ..."
"... Its actually pro-neoliberalism crowd vs anti-neoliberalism crowd. In no way anti-neoliberalism commenters here view this is a character melodrama, although psychologically Hillary probably does has certain problems as her reaction to the death of Gadhafi attests. The key problem with anti-neoliberalism crowd is the question What is a realistic alternative? Thats where differences and policy debate starts. ..."
"... Events do not occur in isolation. GLBA increased TBTF in AIG and Citi. TBTF forced TARP. GLBA greased the skids for CFMA. Democrats gained majority, but not filibuster proof, caught between Iraq and a hard place following their votes for TARP and a broader understanding of their participation in the unanimous consent passage of the CFMA, over objection by Senators James Inhofe (R-OK) and Paul Wellstone (D-MN). ..."
"... It certainly fits the kind of herd mentality that I always saw in corporate Amerika until I retired. The William Greider article posted by RGC was very consistent in its account by John Reed with the details of one or two books written about AIG back in 2009 or so. I dont have time to hunt them up now. Besides, no one would read them anyway. ..."
"... GS was one of several actions taken by the New Deal. That it wasnt sufficient by itself doesnt equate to it wasnt beneficial. ..."
"... "Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century," said then-Treasury Secretary Lawrence Summers. "This historic legislation will better enable American companies to compete in the new economy." ..."
"... The repeal of Glass Steagal was a landmark victory in deregulation that greased the skids for the passage of CFMA once Democrats had been further demoralized by the SCOTUS decision on Bush-v-Gore. The first vote on GLBA was split along party lines, but passed because Republicans had majority and Clinton was willing to sign which was clear from the waiver that had been granted to illegal Citi merger with Travelers. Both Citi and AIG mergers contributed to too big to fail. The CFMA was the nail in the coffin that probably would have never gotten off the ground if Democrats had held the line on the GLBA. Glass-Steagal was insufficient as a regulatory system to prevent the 2008 mortgage crisis, but it was giant as an icon of New Deal financial system reform. Its loss institutionalized too big to fail ..."
"... Gramm Leach Biley was a mistake. But it was not the only failure of US regulatory policies towards financial institutions nor the most important. ..."
"... It was more symbolic caving in on financial regulation than a specific technical failure except for making too big to fail worse at Citi and AIG. It marked a sea change of thinking about financial regulation. Nothing mattered any more, including the CFMA just a little over one year later. Deregulation of derivatives trading mandated by the CFMA was a colossal failure and it is not bizarre to believe that GLBA precipitated the consensus on financial deregulation enough that after the demoralizing defeat of Democrats in Bush-v-Gore then there was no New Deal spirit of financial regulation left. Social development is not just a series of unconnected events. It is carried on a tide of change. A falling tide grounds all boats. ..."
"... We had a financial dereg craze back in the late 1970s and early 1980s which led to the S L disaster. One would have thought we would have learned from that. But then came the dereg craziness 20 years later. And this disaster was much worse. ..."
"... This brings us to Lawrence Summers, the former Treasury Secretary of the United States and at the time right hand man to then Treasury Security Robert Rubin. Mr. Summers was widely credited with implementation of the aggressive tactics used to remove Ms. Born from her office, tactics that multiple sources describe as showing an old world bias against women piercing the glass ceiling. ..."
"... According to numerous published reports, Mr. Summers was involved in. silencing those who questioned the opaque derivative product's design. ..."
"... The Tax Policy Center estimated that a 0.1 percent tax on stock trades, scaled with lower taxes on other assets, would raise $50 billion a year in tax revenue. The implied reduction in trading revenue was even larger. Senator Sanders has proposed a tax of 0.5 percent on equities (also with a scaled tax on other assets). This would lead to an even larger reduction in revenue for the financial industry. ..."
"... Great to see Bakers acknowledgement that an updated Glass-Steagall is just one component of the progressive wings plan to rein in Wall Street, not the sum total of it. Besides, if Wall Street types dont think restoring Glass-Steagall will have any meaningful effects, why do they expend so much energy to disparage it? Methinks they doth protest too much. ..."
"... Yes thats a good way to look it. Wall Street gave the Democrats and Clinton a lot of campaign cash so that they would dismantle Glass-Steagall. ..."
"... Slippery slope. Ya gotta find me a business of any type that does not protest any kind of regulation on their business. ..."
"... Yeah, but usually because of all the bad things they say will happen because of the regulation. The question is, what do they think of Clintons plan? Ive heard surprisingly little about that, and what I have heard is along these lines: http://money.cnn.com/2015/10/08/investing/hillary-clinton-wall-street-plan/ ..."
"... Hillary Clinton unveiled her big plan to curb the worst of Wall Streets excesses on Thursday. The reaction from the banking community was a shrug, if not relief. ..."
"... Iceland's government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled "A better monetary system for Iceland". ..."
Hillary Clinton Is Whitewashing the Financial Catastrophe
She has a plan that she claims will reform Wall Street-but she's deflecting responsibility
from old friends and donors in the industry.
By William Greider
Yesterday 3:11 pm
Hillary Clinton's recent op-ed in The New York Times, "How I'd Rein In Wall Street," was intended
to reassure nervous Democrats who fear she is still in thrall to those mega-bankers of New York
who crashed the American economy. Clinton's brisk recital of plausible reform ideas might convince
wishful thinkers who are not familiar with the complexities of banking. But informed skeptics,
myself included, see a disturbing message in her argument that ought to alarm innocent supporters.
Candidate Clinton is essentially whitewashing the financial catastrophe. She has produced a
clumsy rewrite of what caused the 2008 collapse, one that conveniently leaves her husband out
of the story. He was the president who legislated the predicate for Wall Street's meltdown. Hillary
Clinton's redefinition of the reform problem deflects the blame from Wall Street's most powerful
institutions, like JPMorgan Chase and Goldman Sachs, and instead fingers less celebrated players
that failed. In roundabout fashion, Hillary Clinton sounds like she is assuring old friends and
donors in the financial sector that, if she becomes president, she will not come after them.
The seminal event that sowed financial disaster was the repeal of the New Deal's Glass-Steagall
Act of 1933, which had separated banking into different realms: investment banks, which organize
capital investors for risk-taking ventures; and deposit-holding banks, which serve people as borrowers
and lenders. That law's repeal, a great victory for Wall Street, was delivered by Bill Clinton
in 1999, assisted by the Federal Reserve and the financial sector's armies of lobbyists. The "universal
banking model" was saluted as a modernizing reform that liberated traditional banks to participate
directly and indirectly in long-prohibited and vastly more profitable risk-taking.
Exotic financial instruments like derivatives and credit-default swaps flourished, enabling
old-line bankers to share in the fun and profit on an awesome scale. The banks invented "guarantees"
against loss and sold them to both companies and market players. The fast-expanding financial
sector claimed a larger and larger share of the economy (and still does) at the expense of the
real economy of producers and consumers. The interconnectedness across market sectors created
the illusion of safety. When illusions failed, these connected guarantees became the dragnet that
drove panic in every direction. Ultimately, the federal government had to rescue everyone, foreign
and domestic, to stop the bleeding.
Yet Hillary Clinton asserts in her Times op-ed that repeal of Glass-Steagall had nothing to
do with it. She claims that Glass-Steagall would not have limited the reckless behavior of institutions
like Lehman Brothers or insurance giant AIG, which were not traditional banks. Her argument amounts
to facile evasion that ignores the interconnected exposures. The Federal Reserve spent $180 billion
bailing out AIG so AIG could pay back Goldman Sachs and other banks. If the Fed hadn't acted and
had allowed AIG to fail, the banks would have gone down too.
These sound like esoteric questions of bank regulation (and they are), but the consequences
of pretending they do not matter are enormous. The federal government and Federal Reserve would
remain on the hook for rescuing losers in a future crisis. The largest and most adventurous banks
would remain free to experiment, inventing fictitious guarantees and selling them to eager suckers.
If things go wrong, Uncle Sam cleans up the mess.
Senator Elizabeth Warren and other reformers are pushing a simpler remedy-restore the Glass-Steagall
principles and give citizens a safe, government-insured place to store their money. "Banking should
be boring," Warren explains (her co-sponsor is GOP Senator John McCain).
That's a hard sell in politics, given the banking sector's bear hug of Congress and the White
House, its callous manipulation of both political parties. Of course, it is more complicated than
that. But recreating a safe, stable banking system-a place where ordinary people can keep their
money-ought to be the first benchmark for Democrats who claim to be reformers.
Actually, the most compelling witnesses for Senator Warren's argument are the two bankers who
introduced this adventure in "universal banking" back in the 1990s. They used their political
savvy and relentless muscle to seduce Bill Clinton and his so-called New Democrats. John Reed
was CEO of Citicorp and led the charge. He has since apologized to the nation. Sandy Weill was
chairman of the board and a brilliant financier who envisioned the possibilities of a single,
all-purpose financial house, freed of government's narrow-minded regulations. They won politically,
but at staggering cost to the country.
Weill confessed error back in 2012: "What we should probably do is go and split up investment
banking from banking. Have banks do something that's not going to risk the taxpayer dollars, that's
not going to be too big to fail."
John Reed's confession explained explicitly why their modernizing crusade failed for two fundamental
business reasons. "One was the belief that combining all types of finance into one institution
would drive costs down-and the larger institution the more efficient it would be," Reed wrote
in the Financial Times in November. Reed said, "We now know that there are very few cost efficiencies
that come from the merger of functions-indeed, there may be none at all. It is possible that combining
so much in a single bank makes services more expensive than if they were instead offered by smaller,
specialised players."
The second grave error, Reed said, was trying to mix the two conflicting cultures in banking-bankers
who are pulling in opposite directions. That tension helps explain the competitive greed displayed
by the modernized banking system. This disorder speaks to the current political crisis in ways
that neither Dems nor Republicans wish to confront. It would require the politicians to critique
the bankers (often their funders) in terms of human failure.
"Mixing incompatible cultures is a problem all by itself," Reed wrote. "It makes the entire
finance industry more fragile…. As is now clear, traditional banking attracts one kind of talent,
which is entirely different from the kinds drawn towards investment banking and trading. Traditional
bankers tend to be extroverts, sociable people who are focused on longer term relationships. They
are, in many important respects, risk averse. Investment bankers and their traders are more short
termist. They are comfortable with, and many even seek out, risk and are more focused on immediate
reward."
Reed concludes, "As I have reflected about the years since 1999, I think the lessons of Glass-Steagall
and its repeal suggest that the universal banking model is inherently unstable and unworkable.
No amount of restructuring, management change or regulation is ever likely to change that."
This might sound hopelessly naive, but the Democratic Party might do better in politics if
it told more of the truth more often: what they tried do and why it failed, and what they think
they may have gotten wrong. People already know they haven't gotten a straight story from politicians.
They might be favorably impressed by a little more candor in the plain-spoken manner of John Reed.
Of course it's unfair to pick on the Dems. Republicans have been lying about their big stuff
for so long and so relentlessly that their voters are now staging a wrathful rebellion. Who knows,
maybe a little honest talk might lead to honest debate. Think about it. Do the people want to
hear the truth about our national condition? Could they stand it?
"She claims that Glass-Steagall would not have limited the reckless behavior of institutions
like Lehman Brothers or insurance giant AIG, which were not traditional banks."
Of course this claim is absolutely true. Just like GS would not have affected the other investment
banks, whatever their name was. And just like we would have had to bail out those other banks
whatever their name was.
Peter K. -> EMichael...
Can you list all of the pro- or anti- Wall Street "reforms" and actions Bill Clinton performed
as President including nominating Alan Greenspan as head regulator? Cutting the capital gains
tax? Are you aware of Greenspan's record?
Yes Hillary isn't Bill but she hasn't criticized her husband specifically about his record and
seems to want to have her cake and eat it too.
Of course Hillary is much better than the Republicans, pace Rustbucket and the Green Lantern Lefty
club. Still, critics have a point.
I won't be surprised if she doesn't do much to rein in Wall Street besides some window dressing.
sanjait -> Peter K....
"Can you list all of the pro- or anti- Wall Street "reforms" and actions Bill Clinton
performed..."
That, right there, is what's wrong with Bernie and his fans. They measure everything by whether
it is "pro- or anti- Wall Street". Glass Steagall is anti-Wall Street. A financial transactions
tax is anti-Wall Street. But neither has any hope of controlling systemic financial risk in this
country. None.
You guys want to punish Wall Street but not even bother trying to think of how to achieve useful
policy goals. Some people, like Paine here, are actually open about this vacuity, as if the only
thing that were important were winning a power struggle.
Hillary's plan is flat out better. It's more comprehensive and more effective at reining in
the financial system to limit systemic risk. Period.
You guys want to make this a character melodrama rather than a policy debate, and I fear the
result of that will be that the candidate who actually has the best plan won't get to enact it.
likbez -> sanjait...
"You guys want to make this a character melodrama rather than a policy debate, and I
fear the result of that will be that the candidate who actually has the best plan won't get
to enact it."
You are misrepresenting the positions. It's actually pro-neoliberalism crowd vs anti-neoliberalism
crowd. In no way anti-neoliberalism commenters here view this is a character melodrama, although
psychologically Hillary probably does has certain problems as her reaction to the death of Gadhafi
attests. The key problem with anti-neoliberalism crowd is the question "What is a realistic alternative?"
That's where differences and policy debate starts.
RGC -> EMichael...
"Her argument amounts to facile evasion"
Fred C. Dobbs -> RGC...
'The majority favors policies to the left of Hillary.'
... The Democrats' liberal faction has been greatly overestimated by pundits who mistake noisiness
for clout or assume that the left functions like the right. In fact, liberals hold nowhere near
the power in the Democratic Party that conservatives hold in the Republican Party. And while they
may well be gaining, they're still far from being in charge. ...
Paine -> RGC...
What's not confronted ? Suggest what a System like the pre repeal system would have done in
the 00's. My guess we'd have ended in a crisis anyway. Yes we can segregate the depository system.
But credit is elastic enough to build bubbles without the depository system involved
EMichael -> Paine ...
Exactly.
Most people think of lending like the Bailey Brothers Savings and Loan still exists.
RC AKA Darryl, Ron -> EMichael...
Don't be such a whistle dick. Just because you cannot figure out why GLBA made such an impact
that in no way means that people that do understand are stupid. See my posted comment to RGC on
GLBA just down thread for an more detailed explanation including a linked web article. No, GS
alone would not have prevented the mortgage bubble, but it would have lessened TBTF and GS stood
as icon, a symbol of financial regulation. Hell, if we don't need GS then why don't we just allow
unregulated derivatives trading? Who cares, right? Senators Byron Dorgan, Barbara Boxer, Barbara
Mikulski, Richard Shelby, Tom Harkin, Richard Bryan, Russ Feingold and Bernie Sanders all voted
against GLBA to repeal GS for some strange reason and Dorgan made a really big deal out of it
at the time. I doubt everyone on that list of Senators was just stupid because they did not see
it your way.
RC AKA Darryl, Ron -> EMichael...
I ran all out of ceteris paribus quite some time ago. Events do not occur in isolation. GLBA
increased TBTF in AIG and Citi. TBTF forced TARP. GLBA greased the skids for CFMA. Democrats gained
majority, but not filibuster proof, caught between Iraq and a hard place following their votes
for TARP and a broader understanding of their participation in the unanimous consent passage of
the CFMA, over "objection" by Senators James Inhofe (R-OK) and Paul Wellstone (D-MN). We
have had a Republican majority in the House since the 2010 election and now they have the Senate
as well. If you are that sure that voters just choose divided government, then aren't we better
off to have a Republican POTUS and Democratic Congress?
sanjait -> RC AKA Darryl, Ron...
"I ran all out of ceteris paribus quite some time ago. Events do not occur in isolation.
GLBA increased TBTF in AIG and Citi. TBTF forced TARP. GLBA greased the skids for CFMA. "
I know you think this is a really meaningful string that evidences causation, but it just looks
like you are reaching, reaching, reaching ...
RC AKA Darryl, Ron -> sanjait...
Maybe. No way to say for sure. It certainly fits the kind of herd mentality that I always
saw in corporate Amerika until I retired. The William Greider article posted by RGC was very consistent
in its account by John Reed with the details of one or two books written about AIG back in 2009
or so. I don't have time to hunt them up now. Besides, no one would read them anyway.
I am voting for whoever wins the Democratic nomination for POTUS. Bernie without a like-minded
Congress would not do much good. But when we shoot each other down here at EV without offering
any agreement or consideration that we might not be 100% correct, then that goes against Doc Thoma's
idea of an open forum. Granted, with my great big pair then I am willing to state my opinion with
no consideration for validation or acceptance, but not everyone has that degree of a comfort zone.
Besides, I am so old an cynical that shooting down the overdogs that go after the underdogs is
one of the few things that I still care about.
RGC -> Paine ...
GS was one of several actions taken by the New Deal. That it wasn't sufficient by itself doesn't
equate to it wasn't beneficial.
Glass-Steagall: Warren and Sanders bring it back into focus
Madonna Gauding / May 13, 2015
Senators Bernie Sanders and Elizabeth Warren are putting a new focus on the Glass-Steagall
Act, which was, unfortunately, repealed in 1999 and led directly to the financial crises we have
faced ever since. Here's a bit of history of this legislative debacle from an older post on Occasional
Planet published several years ago :
On November 4, 1999, Senator Byron Dorgan (D-ND) took to the floor of the senate to make an
impassioned speech against the repeal of the Glass-Steagall Act, (alternately known as Gramm Leach
Biley, or the "Financial Modernization Act") Repeal of Glass-Steagall would allow banks to merge
with insurance companies and investments houses. He said "I want to sound a warning call today
about this legislation, I think this legislation is just fundamentally terrible."
According to Sam Stein, writing in 2009 in the Huffington Post, only eight senators voted against
the repeal. Senior staff in the Clinton administration and many now in the Obama administration
praised the repeal as the "most important breakthrough in the world of finance and politics in
decades"
According to Stein, Dorgan warned that banks would become "too big to fail" and claimed that
Congress would "look back in a decade and say we should not have done this." The repeal of Glass
Steagall, of course, was one of several bad policies that helped lead to the current economic
crisis we are in now.
Dorgan wasn't entirely alone. Sens. Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin,
Richard Bryan, Russ Feingold and Bernie Sanders also cast nay votes. The late Sen. Paul Wellstone
opposed the bill, and warned at the time that Congress was "about to repeal the economic stabilizer
without putting any comparable safeguard in its place."
Democratic Senators had sufficient knowledge about the dangers of the repeal of Glass Steagall,
but chose to ignore it. Plenty of experts warned that it would be impossible to "discipline" banks
once the legislation was passed, and that they would get too big and complex to regulate. Editorials
against repeal appeared in the New York Times and other mainstream venues, suggesting that if
the new megabanks were to falter, they could take down the entire global economy, which is exactly
what happened. Stein quotes Ralph Nader who said at the time, "We will look back at this and wonder
how the country was so asleep. It's just a nightmare."
According to Stein:
"The Senate voted to pass Gramm-Leach-Bliley by a vote of 90-8 and reversed what was, for
more than six decades, a framework that had governed the functions and reach of the nation's
largest banks. No longer limited by laws and regulations commercial and investment banks could
now merge. Many had already begun the process, including, among others, J.P. Morgan and Citicorp.
The new law allowed it to be permanent. The updated ground rules were low on oversight and
heavy on risky ventures. Historically in the business of mortgages and credit cards, banks
now would sell insurance and stock.
Nevertheless, the bill did not lack champions, many of whom declared that the original legislation
- forged during the Great Depression - was both antiquated and cumbersome for the banking industry.
Congress had tried 11 times to repeal Glass-Steagall. The twelfth was the charm.
"Today Congress voted to update the rules that have governed financial services since
the Great Depression and replace them with a system for the 21st century," said then-Treasury
Secretary Lawrence Summers. "This historic legislation will better enable American companies
to compete in the new economy."
"I welcome this day as a day of success and triumph," said Sen. Christopher Dodd, (D-Conn.).
"The concerns that we will have a meltdown like 1929 are dramatically overblown," said Sen.
Bob Kerrey, (D-Neb.).
"If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai
becoming the financial capital of the world," said Sen. Chuck Schumer, D-N.Y. "There are many
reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain
competitive."
Unfortunately, the statement by Chuck Schumer sounds very much like it was prepared by a lobbyist.
This vote underscores the way in which our elected officials are so heavily swayed by corporate
and banking money that our voices and needs become irrelevant. It is why we need publicly funded
elections. Democratic senators, the so-called representatives of the people, fell over themselves
to please their Wall Street donors knowing full well there were dangers for the country at large,
for ordinary Americans, in repealing Glass-Steagall.
It is important to hold Democratic senators (along with current members of the Obama administration)
accountable for the significant role they have played in the current economic crisis that has
caused so much suffering for ordinary Americans. In case you were wondering, the current Democratic
Senators who voted yes to repeal the Glass-Steagall act are the following:
Daniel Akaka – Max Baucus – Evan Bayh – Jeff Bingaman – Kent Conrad – Chris Dodd – Dick Durbin
– Dianne Feinstein – Daniel Inouye – Tim Johnson – John Kerry – Herb Kohl – Mary Landrieu – Frank
Lautenberg – Patrick Leahy – Carl Levin – Joseph Lieberman – Blanche Lincoln – Patty Murray –
Jack Reed – Harry Reid – Jay Rockefeller – Chuck Schumer – Ron Wyden
Former House members who voted for repeal who are current Senators.
Mark Udall [as of 2010] – Debbie Stabenow – Bob Menendez – Tom Udall -Sherrod Brown
No longer in the Senate, or passed away, but who voted for repeal:
Joe Biden -Ted Kennedy -Robert Byrd
These Democratic senators would like to forget or make excuses for their enthusiastic vote
on the repeal of Glass Steagall, but it is important to hold them accountable for helping their
bank donors realize obscene profits while their constituents lost jobs, savings and homes. And
it is important to demand that they serve the interests of the American people.
*
[The repeal of Glass Steagal was a landmark victory in deregulation that greased the skids
for the passage of CFMA once Democrats had been further demoralized by the SCOTUS decision on
Bush-v-Gore. The first vote on GLBA was split along party lines, but passed because Republicans
had majority and Clinton was willing to sign which was clear from the waiver that had been granted
to illegal Citi merger with Travelers. Both Citi and AIG mergers contributed to too big to fail.
The CFMA was the nail in the coffin that probably would have never gotten off the ground if Democrats
had held the line on the GLBA. Glass-Steagal was insufficient as a regulatory system to prevent
the 2008 mortgage crisis, but it was giant as an icon of New Deal financial system reform. Its
loss institutionalized too big to fail.]
pgl -> RC AKA Darryl, Ron...
Gramm Leach Biley was a mistake. But it was not the only failure of US regulatory policies
towards financial institutions nor the most important. I think that is what Hillary Clinton
is saying.
RC AKA Darryl, Ron -> pgl...
It was more symbolic caving in on financial regulation than a specific technical failure except
for making too big to fail worse at Citi and AIG. It marked a sea change of thinking about financial
regulation. Nothing mattered any more, including the CFMA just a little over one year later. Deregulation
of derivatives trading mandated by the CFMA was a colossal failure and it is not bizarre to believe
that GLBA precipitated the consensus on financial deregulation enough that after the demoralizing
defeat of Democrats in Bush-v-Gore then there was no New Deal spirit of financial regulation left.
Social development is not just a series of unconnected events. It is carried on a tide of change.
A falling tide grounds all boats.
pgl -> RC AKA Darryl, Ron...
We had a financial dereg craze back in the late 1970's and early 1980's which led to the S&L
disaster. One would have thought we would have learned from that. But then came the dereg craziness
20 years later. And this disaster was much worse.
I don't care whether Hillary says 1999
was a mistake or not. I do care what the regulations of financial institutions will be like going
forward.
RC AKA Darryl, Ron -> pgl...
I cannot disagree with any of that.
sanjait -> RC AKA Darryl, Ron...
"Deregulation of derivatives trading mandated by the CFMA was a colossal failure and it
is not bizarre to believe that GLBA precipitated the consensus"
Yeah, it is kind of bizarre to blame one bill for a crisis that occurred largely because another
bill was passed, based on some some vague assertion about how the first bill made everyone think
crazy.
RC AKA Darryl, Ron -> sanjait...
Democrats did not vote for GLBA until after reconciliation between the House and Senate bills.
Democrats were tossed a bone in the Community Reinvestment Act financing provisions and given
that Bill Clinton was going to sign anyway and that Republicans were able to pass the bill without
a single vote from Democrats then all but a few Democrats bought in. They could not stop it, so
they just bought into it. I thought there was supposed to be an understanding of behaviorism devoted
to understanding the political economy. For that matter Republicans did not need Democrats to
vote for the CFMA either, but they did. That gave Republicans political cover for whatever went
wrong later on. No one with a clue believed things would go well from the passage of either of
these bills. It was pure Wall Street driven kleptocracy.
likbez -> sanjait...
It was not one bill or another. It was a government policy to get traders what they want.
"As the western world wakes to the fact it is in the middle of a debt crisis spiral, intelligent
voices are wondering how this manifested itself? As we speak, those close to the situation could
be engaging in historical revisionism to obfuscate their role in the design of faulty leverage
structures that were identified in the derivatives markets in 1998 and 2008. These same design
flaws, first identified in 1998, are persistent today and could become graphically evident in
the very near future under the weight of a European debt crisis.
Author and Bloomberg columnist William Cohan chronicles the fascinating start of this historic
leverage implosion in his recent article Rethinking Robert Rubin. Readers may recall it was Mr.
Cohan who, in 2004, noted leverage issues that ultimately imploded in 2007-08.
At some point, market watchers will realize the debt crisis story will literally change the
world. They will look to the root cause of the problem, and they might just find one critical
point revealed in Mr. Cohan's article.
This point occurs in 1998 when then Commodity Futures Trading Commission (CFTC) ChairwomanBrooksley
Born identified what now might be recognized as core design flaws in leverage structure used in
Over the Counter (OTC) transactions. Ms. Born brought her concerns public, by first asking just
to study the issue, as appropriate action was not being taken. She issued a concept release paper
that simply asked for more information. "The Commission is not entering into this process with
preconceived results in mind," the document reads.
Ms. Born later noted in, the PBS Frontline documentary on the topic speculation at the CFTC
was the unregulated OTC derivatives were opaque, the risk to the global economy could not be determined
and the risk was potentially catastrophic. As a result of this inquiry, Ms. Born was ultimately
forced from office.
This brings us to Lawrence Summers, the former Treasury Secretary of the United States and
at the time right hand man to then Treasury Security Robert Rubin. Mr. Summers was widely credited
with implementation of the aggressive tactics used to remove Ms. Born from her office, tactics
that multiple sources describe as showing an old world bias against women piercing the glass ceiling.
According to numerous published reports, Mr. Summers was involved in. silencing those who questioned
the opaque derivative product's design. "
RC AKA Darryl, Ron -> Paine ...
TBTF on steroids, might as well CFMA - why not?
Bubbles with less TBTF and a lot less credit
default swaps would have been a lot less messy going in. Without TARP, then Congress might have
still had the guts for making a lesser New Deal.
EMichael -> RC AKA Darryl, Ron...
TARP was window dressing. The curtain that covered up the FED's actions.
pgl -> RGC...
Where have I heard about William Greider? Oh yea - this critique of something stupid he wrote
about a Supreme Court decision:
"Exotic financial instruments like derivatives and credit-default swaps flourished, enabling
old-line bankers to share in the fun and profit on an awesome scale."
These would have flourished even if Glass-Steagall remained on the books. Leave it to RGC to
find some critic of HRC who knows nothing about financial markets.
RGC -> pgl...
Derivatives flourished because of the other deregulation under Clinton, the CFMA. The repeal of
GS helped commercial banks participate.
RGC -> pgl...
The repeal of GS helped commercial banks participate.
Fred C. Dobbs -> pgl...
Warren Buffet used to rail about how risky derivative investing is, until he realized they
are *extremely* important in the re-insurance biz, which is a
big part of Berkshire Hathaway.
Hillary Clinton, Bernie Sanders, and Cracking Down on Wall Street
by Dean Baker
Published: 12 December 2015
The New Yorker ran a rather confused piece on Gary Sernovitz, a managing director at the investment
firm Lime Rock Partners, on whether Bernie Sanders or Hillary Clinton would be more effective
in reining in Wall Street. The piece assures us that Secretary Clinton has a better understanding
of Wall Street and that her plan would be more effective in cracking down on the industry. The
piece is bizarre both because it essentially dismisses the concern with too big to fail banks
and completely ignores Sanders' proposal for a financial transactions tax which is by far the
most important mechanism for reining in the financial industry.
The piece assures us that too big to fail banks are no longer a problem, noting their drop
in profitability from bubble peaks and telling readers:
"not only are Sanders's bogeybanks just one part of Wall Street but they are getting less
powerful and less problematic by the year."
This argument is strange for a couple of reasons. First, the peak of the subprime bubble frenzy
is hardly a good base of comparison. The real question is should we anticipate declining profits
going forward. That hardly seems clear. For example, Citigroup recently reported surging profits,
while Wells Fargo's third quarter profits were up 8 percent from 2014 levels.
If Sernovitz is predicting that the big banks are about to shrivel up to nothingness, the market
does not agree with him. Citigroup has a market capitalization of $152 billion, JPMorgan has a
market cap of $236 billion, and Bank of America has a market cap of $174 billion. Clearly investors
agree with Sanders in thinking that these huge banks will have sizable profits for some time to
come.
The real question on too big to fail is whether the government would sit by and let a Goldman
Sachs or Citigroup go bankrupt. Perhaps some people think that it is now the case, but I've never
met anyone in that group.
Sernovitz is also dismissive on Sanders call for bringing back the Glass-Steagall separation
between commercial banking and investment banking. He makes the comparison to the battle over
the Keystone XL pipeline, which is actually quite appropriate. The Keystone battle did take on
exaggerated importance in the climate debate. There was never a zero/one proposition in which
no tar sands oil would be pumped without the pipeline, while all of it would be pumped if the
pipeline was constructed. Nonetheless, if the Obama administration was committed to restricting
greenhouse gas emissions, it is difficult to see why it would support the building of a pipeline
that would facilitate bringing some of the world's dirtiest oil to market.
In the same vein, Sernovitz is right that it is difficult to see how anything about the growth
of the housing bubble and its subsequent collapse would have been very different if Glass-Steagall
were still in place. And, it is possible in principle to regulate bank's risky practices without
Glass-Steagall, as the Volcker rule is doing. However, enforcement tends to weaken over time under
industry pressure, which is a reason why the clear lines of Glass-Steagall can be beneficial.
Furthermore, as with Keystone, if we want to restrict banks' power, what is the advantage of letting
them get bigger and more complex?
The repeal of Glass-Steagall was sold in large part by boasting of the potential synergies
from combining investment and commercial banking under one roof. But if the operations are kept
completely separate, as is supposed to be the case, where are the synergies?
But the strangest part of Sernovitz's story is that he leaves out Sanders' financial transactions
tax (FTT) altogether. This is bizarre, because the FTT is essentially a hatchet blow to the waste
and exorbitant salaries in the industry.
Most research shows that trading volume is very responsive to the cost of trading, with most
estimates putting the elasticity close to one. This means that if trading costs rise by 50 percent,
then trading volume declines by 50 percent. (In its recent analysis of FTTs, the Tax Policy Center
assumed that the elasticity was 1.5, meaning that trading volume decline by 150 percent of the
increase in trading costs.) The implication of this finding is that the financial industry would
pay the full cost of a financial transactions tax in the form of reduced trading revenue.
The Tax Policy Center estimated that a 0.1 percent tax on stock trades, scaled with lower taxes
on other assets, would raise $50 billion a year in tax revenue. The implied reduction in trading
revenue was even larger. Senator Sanders has proposed a tax of 0.5 percent on equities (also with
a scaled tax on other assets). This would lead to an even larger reduction in revenue for the
financial industry.
It is incredible that Sernovitz would ignore a policy with such enormous consequences for the
financial sector in his assessment of which candidate would be tougher on Wall Street. Sanders
FTT would almost certainly do more to change behavior on Wall Street then everything that Clinton
has proposed taken together by a rather large margin. It's sort of like evaluating the New England
Patriots' Super Bowl prospects without discussing their quarterback.
Syaloch -> Peter K....
Great to see Baker's acknowledgement that an updated Glass-Steagall is just one component
of the progressive wing's plan to rein in Wall Street, not the sum total of it. Besides, if Wall
Street types don't think restoring Glass-Steagall will have any meaningful effects, why do they
expend so much energy to disparage it? Methinks they doth protest too much.
Peter K. -> Syaloch...
Yes that's a good way to look it. Wall Street gave the Democrats and Clinton a lot of campaign
cash so that they would dismantle Glass-Steagall. If they want it done, it's probably not
a good idea.
EMichael -> Syaloch...
Slippery slope. Ya' gotta find me a business of any type that does not protest any kind of regulation
on their business.
Syaloch -> EMichael...
Yeah, but usually because of all the bad things they say will happen because of the regulation.
The question is, what do they think of Clinton's plan? I've heard surprisingly little about that,
and what I have heard is along these lines:
http://money.cnn.com/2015/10/08/investing/hillary-clinton-wall-street-plan/
"Hillary Clinton unveiled her big plan to curb the worst of Wall Street's excesses on Thursday.
The reaction from the banking community was a shrug, if not relief."
pgl -> Syaloch...
Two excellent points!!!
sanjait -> Syaloch...
"Besides, if Wall Street types don't think restoring Glass-Steagall will have any meaningful
effects, why do they expend so much energy to disparage it? Methinks they doth protest too
much."
It has an effect of shrinking the size of a few firms, and that has a detrimental effect on
the top managers of those firms, who get paid more money if they have larger firms to manage. But it has little to no meaningful effect on systemic risk.
So if your main policy goal is to shrink the compensation for a small number of powerful Wall
Street managers, G-S is great. But if you actually want to accomplish something useful to the American people, like limiting
systemic risk in the financial sector, then a plan like Hillary's is much much better. She explained
this fairly well in her recent NYT piece.
Paine -> Peter K....
There is absolutely NO question Bernie is for real. Wall Street does not want Bernie. So they'll
let Hillary talk as big as she needs to . Why should we believe her when an honest guy like
Barry caved once in power
Paine -> Paine ...
Bernie has been anti Wall Street his whole career . He's on a crusade. Hillary is pulling a sham
bola
Paine -> Paine ...
Perhaps too often we look at Wall Street as monolithic whether consciously or not. Obviously we
know it's no monolithic: there are serious differences
When the street is riding high especially. Right now the street is probably not united but
too cautious to display profound differences in public. They're sitting on their hands waiting
to see how high the anti Wall Street tide runs this election cycle. Trump gives them cover and
I really fear secretly Hillary gives them comfort
This all coiled change if Bernie surges. How that happens depends crucially on New Hampshire.
Not Iowa
EMichael -> Paine ...
If Bernie surges and wins the nomination, we will all get to watch the death of the Progressive
movement for a decade or two. Congress will become more GOP dominated, and we will have a President
in office who will make Hoover look like a Socialist.
You should like the moderate Democrats after George McGovern ran in 1972. I'm hoping we have another
1964 with Bernie leading a united Democratic Congress.
EMichael -> pgl...
Not a chance in the world. And I like Sanders much more than anyone else. It just simply cannot,
and will not, happen. He is a communist. Not to me, not to you, but to the vast majority
of American voters.
pgl -> EMichael...
He is not a communist. But I agree - Hillary is winning the Democratic nomination. I have only
one vote and in New York, I'm badly outnumbered.
ilsm -> Paine ...
I believe Hillary will be to liberal causes after she is elected as LBJ was to peace in Vietnam.
Like Bill and Obomber.
pgl -> ilsm...
By 1968, LBJ finally realized it was time to end that stupid war. But it seems certain members
in the State Department undermined his efforts in a cynical ploy to get Nixon to be President.
The Republican Party has had more slime than substance of most of my life time.
pgl -> Peter K....
Gary Sernovitz, a managing director at the investment firm Lime Rock Partners? Why are we listening
to this guy too. It's like letting the fox guard the hen house.
sanjait -> Peter K....
"The piece is bizarre both because it essentially dismisses the concern with too big to
fail banks and completely ignores Sanders' proposal for a financial transactions tax which
is by far the most important mechanism for reining in the financial industry."
This is just wrong. Is financial system risk in any way correlated with the frequency
of transactions? Except for market volatility from HFT ... no. The financial crisis wasn't caused
by a high volume of trades. It was caused by bad investments into highly illiquid assets. Again,
great example of wanting to punish Wall Street but not bothering to think about what actually
works.
Peter K. said...
Robert Reich to the Fed: this is not the time to raise rates.
Iceland, too, is looking at a radical transformation of its money
system, after suffering the crushing boom/bust cycle of the private banking model that bankrupted
its largest banks in 2008. According to a March 2015 article in the UK Telegraph:
Iceland's government is considering a revolutionary monetary proposal – removing the power
of commercial banks to create money and handing it to the central bank. The proposal, which would
be a turnaround in the history of modern finance, was part of a report written by a lawmaker from
the ruling centrist Progress Party, Frosti Sigurjonsson, entitled "A better monetary system for
Iceland".
"The findings will be an important contribution to the upcoming discussion, here and elsewhere,
on money creation and monetary policy," Prime Minister Sigmundur David Gunnlaugsson said. The
report, commissioned by the premier, is aimed at putting an end to a monetary system in place
through a slew of financial crises, including the latest one in 2008.
Under this "Sovereign Money" proposal, the country's central bank would become the only creator
of money. Banks would continue to manage accounts and payments and would serve as intermediaries
between savers and lenders. The proposal is a variant of the Chicago Plan promoted by Kumhof and
Benes of the IMF and the Positive Money group in the UK.
Public Banking Initiatives in Iceland, Ireland and the UK
A major concern with stripping private banks of the power to create money as deposits when
they make loans is that it will seriously reduce the availability of credit in an already sluggish
economy. One solution is to make the banks, or some of them, public institutions. They would still
be creating money when they made loans, but it would be as agents of the government; and the profits
would be available for public use, on the model of the US Bank of North Dakota and the German
Sparkassen (public savings banks).
In Ireland, three political parties – Sinn Fein, the Green Party and Renua Ireland (a new party)
- are now supporting initiatives for a network of local publicly-owned banks on the Sparkassen
model. In the UK, the New Economy Foundation (NEF) is proposing that the failed Royal Bank of
Scotland be transformed into a network of public interest banks on that model. And in Iceland,
public banking is part of the platform of a new political party called the Dawn Party.
December 11, 2015
Reinventing Banking: From Russia to Iceland to Ecuador
"Banks would continue to manage accounts and payments and would serve as intermediaries between
savers and lenders."
OK but that means they issue bank accounts which of course we call deposits.
So is this just semantics? People want checking accounts. People want savings accounts. Otherwise
they would not exist. Iceland plans to do what to stop the private sector from getting what it
wants?
I like the idea of public banks. Let's nationalize JPMorganChase so we don't have to listen
to Jamie Dimon anymore!
sanjait -> pgl...
I don't know for sure (not bothering to search and read the referenced proposals), but I assumed
the described proposal was for an end to fractional reserve banking. Banks would have to have
full reserves to make loans. Or something. I could be wrong about that.
Syaloch said...
Sorry, but Your Favorite Company Can't Be Your Friend
To think that an artificial person, whether corporeal or corporate, can ever be your friend
requires a remarkable level of self-delusion.
A commenter on the Times site aptly quotes Marx in response:
"The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal,
idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound man to
his "natural superiors", and has left remaining no other nexus between man and man than naked
self-interest, than callous "cash payment". It has drowned the most heavenly ecstasies of religious
fervour, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical
calculation. It has resolved personal worth into exchange value, and in place of the numberless
indefeasible chartered freedoms, has set up that single, unconscionable freedom - Free Trade.
In one word, for exploitation, veiled by religious and political illusions, it has substituted
naked, shameless, direct, brutal exploitation.
"The bourgeoisie has stripped of its halo every occupation hitherto honoured and looked
up to with reverent awe. It has converted the physician, the lawyer, the priest, the poet,
the man of science, into its paid wage labourers."
"... Goldman Sachs buzz-acronym BRICS are five of the largest exporters of hot money . It amuses me to no end how so many buy the idea that the BRICS are gonna take over the world... ..."
"... Better definitions would have black money correspond to any government/public spending, declared capital and proceeds from violent crime (i.e. money that is acquired through or enables violence) and honest money to all the undeclared savings, underground economy/trade proceeds and non-institutional drug money. ..."
"... the most of China money leaves through HK do you think HK is a dump ? ..."
"... Over the years I have written several brief explanations of how offshore havens work. The one at the link below covers the basic-basics reasonably well. http://barlowscayman.blogspot.com/2013/01/offshore-tax-havens-what-they-do.html ..."
"... once again, we see banksters and corrupt corporate sector players colluding with corrupt individuals and assorted criminals - many inside .gov itself - to move ill-gotten gains to safer places out of reach of law enforcement in their own countries. ..."
"... Banksters facilitate virtually every financial crime. ..."
Every year, roughly $1 trillion flows illegally out of developing and emerging economies due to
crime, corruption, and tax evasion. This amount is more than these countries receive in foreign direct
investment and foreign aid combined.
This week, a new report was released that highlights the latest data available on this "hot" money.
Assembled by Global Financial Integrity, a research and advisory organization based in Washington,
DC, the report details illicit financial flows of money from developing countries using the latest
information available, which is up until the end of 2013.
The cumulative amount of this "hot money" coming out of developing countries totaled just
over $7.8 trillion between 2004 and 2013. On an annual basis, it breached the $1 trillion
mark each of the last three years of data available, which is good for a growth rate of 6.5% rate
annually.
In Asia, illicit financial outflows are growing even quicker at an 8.6% clip. It's also
on the continent that five of the ten largest source economies for these flows can be found, including
the largest offender, which is Mainland China.
How does this "hot" money leave these countries? Global Financial Integrity has
calculated that 83% of illicit financial flows are due to what it calls "trade misinvoicing".
It's defined as the following:
The misinvoicing of trade is accomplished by misstating the value or volume of an export or
import on a customs invoice. Trade misinvoicing is a form of trade-based money laundering
made possible by the fact that trading partners write their own trade documents, or arrange to
have the documents prepared in a third country (typically a tax haven), a method known as re-invoicing.
Fraudulent manipulation of the price, quantity, or quality of a good or service on an invoice
allows criminals, corrupt government officials, and commercial tax evaders to shift vast amounts
of money across international borders quickly, easily, and nearly always undetected.
Trade misinvoicing accounted for an average of $654.7 billion per year of lost trade in
developing markets over the data set covered by the report.
Goldman Sachs buzz-acronym "BRICS" are five of the largest exporters of "hot money". It
amuses me to no end how so many buy the idea that the BRICS are gonna take over the world...
What the fuck is "illicit" money? Savings that weren't looted away?
Better definitions would have "black" money correspond to any government/public spending,
declared capital and proceeds from violent crime (i.e. money that is acquired through or enables
violence) and honest money to all the undeclared savings, underground economy/trade proceeds and
non-institutional drug money.
avenriv
the most of China money leaves through HK do you think HK is a dump ?
did you ever leave your small town ?
38BWD22
I found Hong Kong rather nice some 20 years ago, Beijing not so much.
We just came back from India.
So, yes, I have been to four of those BRICS, and am not impressed. Sorry.
Feel free to tell me more though. Especially about your travels. ;)
BarnacleBill
As a (retired) tax-haven professional in three countries, and a former Manager of the Cayman
Islands Chamber of Commerce, I must caution against the term "mis-invoicing" - with or without
the hyphen...More properly, it's re-invoicing, and no more illicit than the procedure by which
any trader buys goods at one price and sells them at another.
When a corporate buyer is owned by the same people as own the seller, their transaction may
raise an eyebrow or two, but usually it would be permitted by the published taxation laws of all
the relevant companies, as those laws are interpreted by both private-sector lawyers and the tax
authorities. With transactions of that kind, it is beneficial for the owners if the tax-rates
are different in the two jurisdictions. Well, of course; but that situation is always - always
- allowed by the laws of those jurisdictions, whether they are developed or developing.
"Every year, roughly $1 trillion flows illegally out of developing and emerging economies
due to crime, corruption, and tax evasion"
Yea, that would be banksterz, CIA and their drug running, NGO's and their child trafficking.......
etc... Might want to throw a few more zero's in there too.
Bob who runs the deli down the street and pockets $500 "illicit" dollars a week is not your worry
or concern you stupid fuckkkerz.
zeroboris
The Russian central bank every year publishes a report of how many billions of dollars have
stolen from our economy, and... does nothing, nothing at all to stop this.
smacker
There are good arguments to say that what people do with their own money is nothing to do with
.gov.
But once again, we see banksters and corrupt corporate sector players colluding with corrupt
individuals and assorted criminals - many inside .gov itself - to move ill-gotten gains to safer
places out of reach of law enforcement in their own countries.
Banksters facilitate virtually every financial crime.
"There is no reason for central banks to have the kind of independence that judicial
institutions have. Justice may be blind and above politics, but money and banking are not." Economic
and politics are like Siamese twins (which actually . If somebody trying to separate them it is a
clear sign that the guy is either neoliberal propagandists or outright crook.
Notable quotes:
"... I think FED chairman is the second most powerful political position in the USA after the POTUS. Or may be in some respects it is even the first ;-) So it is quintessentially high-power political position masked with the smokescreen of purely economic (like many other things are camouflaged under neoliberalism.) ..."
"... I think that is a hidden principle behind attacks on FED chair. A neoliberal principle that the state should not intrude into economics and limit itself to the police, security, defense, law enforcement and few other related to this functions. So their point that she overextended her mandate is an objection based on principle. Which can be violated only if it is used to uphold neoliberalism, as Greenspan did during his career many times. ..."
"... This kind of debate seems to be a by-product of the contemporary obsession with having an independent central bank, run according to the fantasy that there is such a thing as a neutral or apolitical way to conduct monetary policy. ..."
"... A number of commenters and authors have recently pointed out that inequality may not just be an unrelated phenomenon to monetary policy, but actually, in part at least, a byproduct of it. ..."
"... The theory is that the Fed in the Great Moderation age has been so keen to stave off even the possibility of inflation that it chokes down the vigor of recoveries before they get to the part where median wages start rising quickly. The result is that wages get ratcheted down with the economic cycle, falling during recessions and never fully recovering during the recoveries. ..."
"... Two Things: (i) The Fed should be open and honest about monetary policy. No one wants to return to the Greenspan days. (ii) Brad Delong is a neoliberal hack. ..."
"... As to why risk a political backlash in the piece, the short answer is: to invoke the debate on whether politics or fact (science) is going to dominate. Because they can't both. See: Romer. Let's have this out once and for all. ..."
Fine column, with which I agree. Federal Reserve policy as such is difficult and contentious enough
to avoid wandering to social-economic analysis or philosophy from aspects of the Fed mandate.
As for the use of the word "hack" in referring to Janet Yellen, that needlessly insulting use
was by a Washington Post editor and not by columnist Michael Strain.
anne -> RW (the other)...
As Brad notes, many Fed Chairs before Yellen have opined on matters outside monetary policy
so why is Yellen subject to a different standard?
[ Fine, I have reconsidered and agree. No matter how the headline was written, the headline
was meant to be intimidating and was willfully mean and that could and should have been made clear
immediately by the writer of the column. ]
likbez -> anne...
"Federal Reserve policy as such is difficult and contentious enough to avoid wandering to social-economic
analysis or philosophy from aspects of the Fed mandate."
Anne,
I think FED chairman is the second most powerful political position in the USA after the POTUS.
Or may be in some respects it is even the first ;-) So it is quintessentially high-power political position masked with the smokescreen of "purely
economic" (like many other things are camouflaged under neoliberalism.)
That's why Greenspan got it, while being despised by his Wall-Street colleagues...
He got it because he was perfect for promoting deregulation political agenda from the position
of FED chair.
pgl -> likbez...
Greenspan was despised on Wall Street? Wow as he tried so hard to serve their interests. I
guess the Wall Street crowd is never happy no matter how much income we feed these blow hards.
anne -> likbez...
So it is quintessentially high-power political position masked with the smokescreen of "purely
economic" (like many other things are camouflaged under neoliberalism.)
[ I understand, and am convinced. ]
Peter K. said...
I respectfully disagree. Republicans are always working the refs and despite what the writer
from AEI said, they're okay with conservative Fed chairs talking politics. They have double standards.
Greenspan testified to Congress on behalf of Bush's tax cuts for the rich. Something about
how since Clinton balanced the budget, the financial markets had too little safe debt to work
with. (maybe that's why they dove into mortgaged-backed securities). But tax cuts versus more
government spending? He and Rubin advised Clinton to drop his middle class spending bill and trade
deficit reduction for lower interest rates. That's economics which have political outcomes.
So if the rightwing is going to work the the refs, so should the left. We shouldn't unilaterally
disarm over fears Congress will gun for the Fed. There should be more groups like Fed Up protesting.
The good thing about Yellen's speech is that it's a signal to progressives that inequality
is problem for her even as she is raising rates in a political dance with hawks and Congress.
The Fed is constantly accused of increasing inequality so it's good Yellen is saying she thinks
it's a bad thing and not American.
Bernie Sanders is right that for change to happen we'll need more political involvement from
regular citizens. We'll need a popular movement with many leaders.
The Fed should be square in the sights of a progressive movement. A high-pressured economy
with full employment should be a top priority.
Instead I saw Nancy Pelosi being interviewed by Al Hunt on Charlie Rose the other night. Hunt
asked her about Yellen raising rates.
Pelosi said no comment as she wasn't looking at the data Yellen was and didn't want to interfere.
The Fed should be independent, etc. Perhaps like Thoma she has the best of motives and doesn't
want to motivate the Republicans to go after the Fed and oppose what she wants.
Still I felt the Democratic leadership should be committed to a high-pressure economy. Her
staff should know what Krugman, Summers etc are saying. What the IMF and World Bank are sayings.
She should have said "they shouldn't raise rates until they see the whites of inflation's eyes"
as Krugman memorably put it. She should have said that emphatically.
We need a Democratic Party like that.
Instead Peter Diamond is blocked from becoming a Fed governor by Republicans and Pelosi is
afraid to comment on monetary policy.
Must-Read: I would beg the highly-esteemed Mark Thoma to draw a distinction here between "inappropriate"
and unwise. In my view, it is not at all inappropriate for Fed Chair Janet Yellen to express her
concern about excessive inequality. Previous Fed Chairs, after all, have expressed their liking
for inequality as an essential engine of economic growth over and over again over the past half
century--with exactly zero critical snarking from the American Enterprise Institute for trespassing
beyond the boundaries of their role.
But that it is not inappropriate for Janet Yellen to do so does not mean that it is wise. Mark's
argument is, I think, that given the current political situation it is unwise for Janet to further
incite the ire of the nutboys in the way that even the mildest expression of concern about rising
inequality will do.
That may or may not be true. I think it is not.
But I do not think that bears on my point that Michael R. Strain's arguments that Janet Yellen's
speech on inequality was inappropriate are void, wrong, erroneous, inattentive to precedent, shoddy,
expired, expired, gone to meet their maker, bereft of life, resting in peace, pushing up the daisies,
kicked the bucket, shuffled off their mortal coil, run down the curtain, and joined the bleeding
choir invisible:
Mark Thoma: Why It's Tricky for Fed Officials to Talk Politically: "I think I disagree with
Brad DeLong...
pgl -> Peter K....
"my point that Michael R. Strain's arguments that Janet Yellen's speech on inequality
was inappropriate are void, wrong, erroneous..."
DeLong is exactly right here. Strain's argument has its own share of partisan lies whereas
Yellen is telling the truth. Brad will not be intimidated by this AEI weasel.
sanjait said...
Why would Yellen not talk about inequality? It's an important macroeconomic topic and one that
is relevant for her job. It's both an input and an output variable that is related to monetary
policy.
And, arguably I think, median wage growth should be regarded as a policy goal for the Fed,
related to its explicit mandate of "maximum employment."
But even if you think inequality is unrelated to the Fed's policy goals, that doesn't stop
them from talking about other topics. Do people accuse the Fed of playing politics when they talk
about desiring reduced financial market volatility? That has little to do with growth, employment
and general price stability.
likbez -> sanjait...
I think that is a hidden principle behind attacks on FED chair. A neoliberal principle that the state should not intrude into economics and limit itself to
the police, security, defense, law enforcement and few other related to this functions. So their point that she overextended her mandate is an objection based on principle. Which
can be violated only if it is used to uphold neoliberalism, as Greenspan did during his career
many times.
Sandwichman said...
I think I disagree with Mark Thoma's disagreement with Brad DeLong. Actually, ALL economic
discourse is political and efforts to restrain the politics are inevitably efforts to keep the
politics one-sided
Dan Kervick said...
This kind of debate seems to be a by-product of the contemporary obsession with having
an "independent" central bank, run according to the fantasy that there is such a thing as a neutral
or apolitical way to conduct monetary policy.
But there really isn't. Different kinds of social, economic and political values and policy
agendas are going to call for different kinds monetary and credit policies. It might be better
for our political health if the Fed were administratively re-located as an executive branch agency
that is in turn part of a broader Department of Money and Banking - no different from the Departments
of Agriculture, Labor, Education, etc. In that case everybody would then view Fed governors as
ordinary executive branch appointees who report to the President, and whose policies are naturally
an extension of the administration's broader agenda. Then if people don't like the monetary policies
that are carried out, that would be one factor in their decision about whom to vote for.
There is no reason for central banks to have the kind of independence that judicial institutions
have. Justice may be blind and above politics, but money and banking are not. Decisions in that
latter area should be no more politics-free than decisions about taxing and spending. If we fold
the central bank more completely into the regular processes of representative government, then
if a candidate wants to run on a platform of keeping interest rates low, small business credit
easy, bank profits small, etc., they could do so without all of the doubletalk about the protecting
the independence of the sacrosanct bankers' temple.
We could also then avoid unproductive wheel-spinning about that impossibly vague and hedged
Fed mandate that can be stretched to mean almost anything people want it to mean. The Fed's mandate
under the political solution would just be whatever monetary policy the President ran on.
likbez -> Dan Kervick...
"The Fed's mandate under the political solution would just be whatever monetary policy
the President ran on"
Perfect !
Actually sanjait in his post made a good point why this illusive goal is desirable (providing
"electoral advantage") although Greenspan probably violated this rule. A couple of hikes of interest
rates from now till election probably will doom Democrats.
Also the idea of FEB independence went into overdrive since 80th not accidentally. It has its
value in enhancing the level of deregulation.
Among other things it helps to protect large financial institutions from outright nationalization
in cases like 2008.
Does somebody in this forum really think that Bernanke has an option of putting a couple of
Wall-Street most violent and destructive behemoths into receivership (in other words nationalize
them) in 2008 without Congress approval ?
Dan Kervick -> Sanjait ...
Sanjait, with due respect, you are not really responding to the reform proposal, but only
affirming the differences between that proposal and the current system.
Yes, of course fiscal policy is "constrained" by Congress. Indeed, it is not just constrained by
Congress but actually made by Congress, subject only to an overridable executive branch veto. The
executive branch is responsible primarily for carrying out the legislature's fiscal directives.
That's the point. In a democratic system decisions about all forms of taxation and government
spending are supposed to be made by the elected legislative branch, and then executed by agencies
of the executive branch. My proposal is that monetary policy should be handled in the same way:
by the elected political branches of the government.
You point out that under current arrangements, central banks can, if they choose, effect large
monetary offsets to fiscal policy (or at least to some of the aggregate macroeconomic effects of
those policies). I don't understand why any non-elected and politically unaccountable branch of
our government should have the power to offset the policies of the elected branches in this way.
Fiscal and monetary policy need to be yoked together to achieve policy ends effectively. Those
policy ends should be the ones people vote for, not the ones a handful of men and women happen to
think are appropriate.
JF -> Dan Kervick...
"In a democratic system" is what you wrote.
It is more proper to refer to it as republicanism. The separation of powers doctrine, underlying
the US constitution, is a reflection of James Madison's characterization in the 51st The
Federalist Paper, and it is a US-defined republicanism that is almost unique:
"the republican form, wherein the legislative authority necessarily predominates."
- or something like that is the quote.
In the US framers' view, at least those who constructed the re-write in 1787 and were the leaders
- I'd say the most important word in Madison's explanation is the word "necessarily" - this
philosophy has all law and policy stemming from the public, it presumes that you can't have
stability and dynamic change of benefit to society without this.
Arguably, aristocracies, fascists, totalitarians, and all the other isms, just don't see it that
way, they see things as top-down ordering of society.
The mythology of the monetary theorizing and the notions about a central bank being independently
delphic has some of this top-down ordering view to it (austerianism, comes to mind). Well, I
don't believe in a religious sense that this is how it should be, nor do you it seems.
It will be an interesting Congress in 2017 when new legislative authorities are enacted to
establish clearer framing of the ministerial duties now held by the FRB.
Are FED officials scared that this will happen, and as a result they circle the wagons with their
associates in the financial community now to fend off the public????
I hope this is not true. They can allay their own fears by leading not back toward 1907, in my
opinion.
Of course, I could say where I'd like economic policies to go, and do here often, but this thread
is about Yellin and other FED officials.
I recognize that FRB officials can say things too, and should, as leaders of this nation (with a
whole lot of research power and evidence available to them their commentary on political
economics should have merit and be influential).
Thanks for continuing to remind people that we govern ourselves in the US in a US-defined
republican-form. But I think the people still respect and listen to leadership - so speak out FED
officials.
JF -> Dan Kervick...
But Dan K, then you'd de-mythologize an entire wing of macroeconomics in a wing referred to as
monetary theory based on a separate Central Bank, or some non-political theory of money.
Don't mind the theory as it is an analytic framework that questions and sometimes informs - but
it is good to step back and realize some of the religious-like framing.
It is political-economy.
Peter K. -> pgl...
Yellen really lays it out in her speech.
"The extent of and continuing increase in inequality in the United States greatly concern
me. The past several decades have seen the most sustained rise in inequality since the 19th
century after more than 40 years of narrowing inequality following the Great Depression. By
some estimates, income and wealth inequality are near their highest levels in the past hundred
years, much higher than the average during that time span and probably higher than for much of
American history before then.2 It is no secret that the past few decades of widening
inequality can be summed up as significant income and wealth gains for those at the very top
and stagnant living standards for the majority. I think it is appropriate to ask whether this
trend is compatible with values rooted in our nation's history, among them the high value
Americans have traditionally placed on equality of opportunity."
And even links to Piketty in footnote 42.
"Along with other economic advantages, it is likely that large inheritances play a role in
the fairly limited intergenerational mobility that I described earlier.42"
42. This topic is discussed extensively in Thomas Piketty (2014), Capital in the 21st Century,
trans. Arthur Goldhammer (Cambridge, Mass.: Belknap Press). Return to text
Sanjait said...
A number of commenters and authors have recently pointed out that inequality may not just
be an unrelated phenomenon to monetary policy, but actually, in part at least, a byproduct of it.
The theory is that the Fed in the Great Moderation age has been so keen to stave off even the
possibility of inflation that it chokes down the vigor of recoveries before they get to the part
where median wages start rising quickly. The result is that wages get ratcheted down with the
economic cycle, falling during recessions and never fully recovering during the recoveries.
Do I believe this theory? Increasingly, yes I do. And seeing the Fed right now decide to raise
rates, citing accelerating wage growth as one of the main reasons, has reinforced my belief.
A Boy Named Sue said...
Two Things: (i) The Fed should be open and honest about monetary policy. No one wants to
return to the Greenspan days. (ii) Brad Delong is a neoliberal hack.
A Boy Named Sue -> A Boy Named Sue...
I do admit, Delong is my favorite conservative economist. He is witty and educational, unlike
most RW hacks.
Jeff said...
As to "why risk a political backlash" in the piece, the short answer is: to invoke the
debate on whether politics or fact (science) is going to dominate. Because they can't both. See:
Romer. Let's have this out once and for all.
"... Most publicly traded U.S. companies reward top managers for hitting performance targets, meant to tie the interests of managers and shareholders together. At many big companies, those interests are deemed to be best aligned by linking executive performance to earnings per share, along with measures derived from the company's stock price. ..."
"... But these metrics may not be solely a reflection of a company's operating performance. They can be, and often are, influenced through stock repurchases. In addition to cutting the number of a company's shares outstanding, and thus lifting EPS, buybacks also increase demand for the shares, usually providing a lift to the share price, which affects other performance markers. ..."
"... Pay for performance as it is often structured creates "very troublesome, problematic incentives that can potentially drive very short-term thinking." ..."
"... As reported in the first article in this series, share buybacks by U.S. non-financial companies reached a record $520 billion in the most recent reporting year. A Reuters analysis of 3,300 non-financial companies found that together, buybacks and dividends have surpassed total capital expenditures and are more than double research and development spending. ..."
"... "There's been an over-focus on buybacks and raising EPS to hit share option targets, and we know that those are concentrated in the hands of the few, and that the few is in the top 1 percent," said James Montier, a member of the asset allocation team at global investment firm GMO in London, which manages more than $100 billion in assets. ..."
"... The introduction of performance targets has been a driver of surging executive pay, helping to widen the gap between the richest in America and the rest of the country. Median CEO pay among companies in the S P 500 increased to a record $10.3 million last year, up from $8.6 million in 2010, according to data firm Equilar. ..."
"... At those levels, CEOs last year were paid 303 times what workers in their industries earned, compared with a ratio of 59 times in 1989, according to the Economic Policy Institute, a Washington-based nonprofit. ..."
NEW YORK(Reuters) - When health insurer Humana Inc reported worse-than-expected quarterly earnings
in late 2014 – including a 21 percent drop in net income – it softened the blow by immediately telling
investors it would make a $500 million share repurchase.
In addition to soothing shareholders, the surprise buyback benefited the company's senior executives.
It added around two cents to the company's annual earnings per share, allowing Humana to surpass
its $7.50 EPS target by a single cent and unlocking higher pay for top managers under terms of the
company's compensation agreement.
Thanks to Humana hitting that target, Chief Executive Officer Bruce Broussard earned a $1.68 million
bonus for 2014.
Most publicly traded U.S. companies reward top managers for hitting performance targets, meant
to tie the interests of managers and shareholders together. At many big companies, those interests
are deemed to be best aligned by linking executive performance to earnings per share, along with
measures derived from the company's stock price.
But these metrics may not be solely a reflection of a company's operating performance. They
can be, and often are, influenced through stock repurchases. In addition to cutting the number of
a company's shares outstanding, and thus lifting EPS, buybacks also increase demand for the shares,
usually providing a lift to the share price, which affects other performance markers.
As corporate America engages in an unprecedented buyback binge, soaring CEO pay tied to short-term
performance measures like EPS is prompting criticism that executives are using stock repurchases
to enrich themselves at the expense of long-term corporate health, capital investment and employment.
"We've accepted a definition of performance that is narrow and quite possibly inappropriate,"
said Rosanna Landis Weaver, program manager of the executive compensation initiative at As You Sow,
a Washington, D.C., nonprofit that promotes corporate responsibility. Pay for performance as
it is often structured creates "very troublesome, problematic incentives that can potentially drive
very short-term thinking."
A Reuters analysis of the companies in the Standard & Poor's 500 Index found that 255 of those
companies reward executives in part by using EPS, while another 28 use other per-share metrics that
can be influenced by share buybacks.
In addition, 303 also use total shareholder return, essentially a company's share price appreciation
plus dividends, and 169 companies use both EPS and total shareholder return to help determine pay.
STANDARD PRACTICE
EPS and share-price metrics underpin much of the compensation of some of the highest-paid CEOs,
including those at Walt Disney Co, Viacom Inc, 21st Century Fox Inc, Target Corp and Cisco Systems
Inc.
... ... ...
As reported in the first article in this series, share buybacks by U.S. non-financial companies
reached a record $520 billion in the most recent reporting year. A Reuters analysis of 3,300 non-financial
companies found that together, buybacks and dividends have surpassed total capital expenditures and
are more than double research and development spending.
Companies buy back their shares for various reasons. They do it when they believe their shares
are undervalued, or to make use of cash or cheap debt financing when business conditions don't justify
capital or R&D spending. They also do it to meet the expectations of increasingly demanding investors.
Lately, the sheer volume of buybacks has prompted complaints among academics, politicians and
investors that massive stock repurchases are stifling innovation and hurting U.S. competitiveness
- and contributing to widening income inequality by rewarding executives with ever higher pay, often
divorced from a company's underlying performance.
"There's been an over-focus on buybacks and raising EPS to hit share option targets, and we
know that those are concentrated in the hands of the few, and that the few is in the top 1 percent,"
said James Montier, a member of the asset allocation team at global investment firm GMO in London,
which manages more than $100 billion in assets.
The introduction of performance targets has been a driver of surging executive pay, helping
to widen the gap between the richest in America and the rest of the country. Median CEO pay among
companies in the S&P 500 increased to a record $10.3 million last year, up from $8.6 million in 2010,
according to data firm Equilar.
At those levels, CEOs last year were paid 303 times what workers in their industries earned,
compared with a ratio of 59 times in 1989, according to the Economic Policy Institute, a Washington-based
nonprofit.
SALARY AND A LOT MORE
Today, the bulk of CEO compensation comes from cash and stock awards, much of it tied to performance
metrics. Last year, base salary accounted for just 8 percent of CEO pay for S&P 500 companies, while
cash and stock incentives made up more than 45 percent, according to proxy advisory firm Institutional
Shareholder Services.
...In 1992, Congress changed the tax code to curb rising executive pay and encourage performance-based
compensation. It didn't work. Instead, the shift is widely blamed for soaring executive pay and a
heavier emphasis on short-term results.
Companies started tying performance pay to "short-term metrics, and suddenly all the things we
don't want to happen start happening," said Lynn Stout, a professor of corporate and business law
at Cornell Law School in Ithaca, New York. "Despite 20 years of trying, we have still failed to come
up with an objective performance metric that can't be gamed."
Shareholder expectations have changed, too. The individuals and other smaller, mostly passive
investors who dominated equity markets during the postwar decades have given way to large institutional
investors. These institutions tend to want higher returns, sooner, than their predecessors. Consider
that the average time investors held a particular share has fallen from around eight years in 1960
to a year and a half now, according to New York Stock Exchange data.
"TOO EASY TO MANIPULATE"
Companies like to use EPS as a performance metric because it is the primary focus of financial
analysts when assessing the value of a stock and of investors when evaluating their return on investment.
But "it is not an appropriate target, it's too easy to manipulate," said Almeida, the University
of Illinois finance professor.
...By providing a lift to a stock's price, buybacks can increase total shareholder return to target
levels, resulting in more stock awards for executives. And of course, the higher stock price lifts
the value of company stock they already own.
"It can goose the price at time when the high price means they earn performance shares … even
if the stock price later goes back down, they got their shares," said Michael Dorff, a law professor
at the Southwestern Law School in Los Angeles.
Exxon Corp, the largest repurchaser of shares over the past decade, has rejected shareholder proposals
that it add three-year targets based on shareholder return to its compensation program. In its most
recent proxy, the energy company said doing so could increase risk-taking and encourage underinvestment
to achieve short-term results.
The energy giant makes half of its annual executive bonus payments contingent on meeting longer-term
EPS thresholds. Since 2005, the company has spent more than $200 billion on buybacks.
ADDITIONAL TWEAKS
While performance targets are specific, they aren't necessarily fixed. Corporate boards often
adjust them or how they are calculated in ways that lift executive pay.
"... As Vice President Joseph R. Biden Jr. aims to curb corruption in Ukraine, his son, Hunter, sits on the board of a Ukrainian company that the American ambassador has accused of having illicit assets. ..."
"... What is he, sort of a wayward, neer-do-well playboy type? Not really. Hes a graduate of Yale Law School and a former senior vice-president at MBNA America Bank. Good for him. During the Clinton administration he worked in the US Department of Commerce. Hes presently a partner in an investment firm. And counsel for a national law firm. And an adjunct professor at Georgetown University. I get it: he likes to keep busy. He has even found the time to join the board of a gas company called Burisma Holdings Ltd. Never heard of it. Perhaps thats because its a Ukrainian gas company; Ukraines largest private gas producer, in fact. Hes taking charge of the companys legal unit. Isnt that a bit fishy? Why do you say that? Because hes the vice-presidents son! Thats a coincidence. This is totally based on merit, said Burismas chairman, Alan Apter. ..."
"... Who? Devon Archer, who works with Hunter Biden at Rosemont Seneca partners, which is half owned by Rosemont Capital, a private equity firm founded by Archer and Christopher Heinz. ..."
"... Who? Christopher Heinz … John Kerrys stepson. ..."
"... I think Putins propaganda people can take a long weekend; their work is being done for them. ..."
Biden, His Son and the Case Against a Ukrainian Oligarch
By JAMES RISEN
As Vice President Joseph R. Biden Jr. aims to curb corruption in Ukraine, his son, Hunter,
sits on the board of a Ukrainian company that the American ambassador has accused of having "illicit
assets."
Why shouldn't Hunter Biden join the board of a gas company in Ukraine?
The son of the US vice-president has been chosen to take charge of energy firm Burisma's legal
unit – a decision based purely on merit, of course.
Name: Hunter Biden.
Age: 44.
Appearance: Chip off the old block.
His names rings a bell. Is he related to someone famous? He's the son of Joe Biden, the US
vice president.
What is he, sort of a wayward, ne'er-do-well playboy type? Not really. He's a graduate of Yale
Law School and a former senior vice-president at MBNA America Bank. Good for him. During the Clinton administration he worked in the US Department of Commerce.
He's presently a partner in an investment firm. And counsel for a national law firm. And an adjunct
professor at Georgetown University. I get it: he likes to keep busy. He has even found the time to join the board of a gas company
called Burisma Holdings Ltd. Never heard of it. Perhaps that's because it's a Ukrainian gas company; Ukraine's largest private
gas producer, in fact. He's taking charge of the company's legal unit. Isn't that a bit fishy? Why do you say that? Because he's the vice-president's son! That's a coincidence. "This is totally based on merit,"
said Burisma's chairman, Alan Apter.
He doesn't sound very Ukrainian. He's American, as is the other new board member, Devon Archer.
Who? Devon Archer, who works with Hunter Biden at Rosemont Seneca partners, which is half owned
by Rosemont Capital, a private equity firm founded by Archer and Christopher Heinz.
Who? Christopher Heinz … John Kerry's stepson.
I think Putin's propaganda people can take a long weekend; their work is being done for them.
What do you mean?
Hasn't Joe Biden pledged to help Ukraine become more energy independent in the wake of its
troubles with Russia? Well, yes.
And isn't Burisma, as a domestic producer, well positioned to profit from rising gas prices
caused by the conflict? Possibly, but Hunter Biden is a salaried board member, not an investor.
According to anonymous sources in the Wall Street Journal, neither Rosemont Seneca nor Rosemont
Capital has made any financial investment in Burisma.
So it's not fishy at all? No one's saying that.
Do say: "Somebody needs to get involved in Ukraine's corporate governance, and it might as
well be a clutch of rich, well-connected American dudes with weird first names."
Meta-criticism of reports in this case is neither here nor there, since it's possible to track down
the original sources.
The Times summary of Ms. Rey's Jackson Hole paper is accurate; in it she
does discuss the importance of the global financial cycle in creating boom and bust cycles in emerging
markets. (This isn't news to anyone who's followed Krugman's writings on global financial crises
over the years.)
When Yellen announced that the Fed would not raise rates in September, she did cite "heightened
uncertainties abroad" as a factor. While I cannot find her mentioning China specifically, a lot of
the discussion in financial sources prior to the announcement cite the Chinese devaluation as an
important factor leading to Yellen's decision.
As for economists warning that a rate increase combined with uncertain exchange rates in China
and other countries would weaken global growth, that was most likely a reference to the IMF's World
Economic Outlook report, which does indeed make this argument.
When capital became unable of reaping large and fairly secure profits from manufacturing it like
water tries to find other ways. It starts with semi-criminalizing finance -- that's the origin
of the term "casino capitalism" (aka neoliberalism). I see casino capitalism as a set of semi-criminal
ways of maintaining the rate of profits.
The key prerequisite here is corruption of regulators. So laws on the book does not matter
much if regulators do not enforce them.
As Joseph Schumpeter noted, capitalism is not a steady-state system. It is unstable system
in which population constantly experience and then try to overcome one crisis after another. Joseph
Schumpeter naively assumed that the net result is reimaging itself via so called "creative destruction".
But what we observe now it "uncreative destruction". In other words casino capitalism is devouring
the host, the US society.
So all those Hillary statements are for plebs consumption only (another attempt to play "change
we can believe in" trick). Just a hot air designed to get elected. Both Clintons are in the pocket
of financial oligarchy and will never be able to get out of it alive.
GeorgeK said...
I believe I'm the only one on this blog that has actually traded bonds, done swaps and hedged
bank portfolios with futures contracts. Sooo I kinda know something about this topic.
Hilary is a fraud; her daughter worked at a Hedge fund where she met her husband Marc Mezvinsky,
who is now a money manager at the Eaglevale fund. Oddly many of the Eaglevale investors are investors
in the Clinton Foundation and have also given money to Hilary's campaign. The Clinton Foundation
gets boat loads of money from Hedge funds and will not raise taxes on such a rich source of funding.
The grooms mother is Marjory Margolies (ex)Mezvinsky, she cast the final vote giving Clinton
the winning vote to raise taxes. She subsequently lost her run for reelection to congress, then
her husband was convicted of fraud and they divorced.
This speech is an attempt to pry people away from Bernie, it won't work with primary voters
but might with what's left of rational Republicans in the general election.
When capital became unable of reaping large and fairly secure profits from manufacturing it like
water tries to find other ways. It starts with semi-criminalizing finance -- that's the origin
of the term "casino capitalism" (aka neoliberalism). I see casino capitalism as a set of semi-criminal
ways of maintaining the rate of profits.
The key prerequisite here is corruption of regulators. So laws on the book does not matter
much if regulators do not enforce them.
As Joseph Schumpeter noted, capitalism is not a steady-state system. It is unstable system
in which population constantly experience and then try to overcome one crisis after another. Joseph
Schumpeter naively assumed that the net result is reimaging itself via so called "creative destruction".
But what we observe now it "uncreative destruction". In other words casino capitalism is devouring
the host, the US society.
So all those Hillary statements are for plebs consumption only (another attempt to play "change
we can believe in" trick). Just a hot air designed to get elected. Both Clintons are in the pocket
of financial oligarchy and will never be able to get out of it alive.
GeorgeK said...
I believe I'm the only one on this blog that has actually traded bonds, done swaps and
hedged bank portfolios with futures contracts. Sooo I kinda know something about this topic.
Hilary is a fraud; her daughter worked at a Hedge fund where she met her husband Marc
Mezvinsky, who is now a money manager at the Eaglevale fund. Oddly many of the Eaglevale
investors are investors in the Clinton Foundation and have also given money to Hilary's
campaign. The Clinton Foundation gets boat loads of money from Hedge funds and will not raise
taxes on such a rich source of funding.
The grooms mother is Marjory Margolies (ex)Mezvinsky, she cast the final vote giving Clinton
the winning vote to raise taxes. She subsequently lost her run for reelection to congress,
then her husband was convicted of fraud and they divorced.
This speech is an attempt to pry people away from Bernie, it won't work with primary voters
but might with what's left of rational Republicans in the general election.
Many studies of the Eurozone crisis focus on peripheral European states' current account deficits,
or German neo-mercantilist policies that promoted export surpluses. However, German financialization
and input on the eurozone's financial architecture promoted deficits, increased systemic risk, and
facilitated the onset of Europe's subsequent crises.
Increasing German financial sector competition
encouraged German banks' increasing securitization and participation in global capital markets. Regional
liberalization created new marketplaces for German finance and increased crisis risk as current accounts
diverged between Europe's core and periphery. After the global financial crisis of 2008, German losses
on international securitized assets prompted retrenchment of lending, paving the way for the eurozone's
sovereign debt crisis. Rethinking how financial liberalization facilitated German and European financial
crises may prevent the eurozone from repeating these performances in the future.
After the 1970s, German banks' trading activity came to surpass lending as the largest share of
assets, while German firms increasingly borrowed in international capital markets rather than from
domestic banks. Private banks alleged that political subsidies and higher credit ratings for Landesbanks, public banks that insured household, small enterprise, and local banks' access
to capital, were unfair, and, in response, German lawmakers eliminated state guarantees for public
banks. Landesbanks, despite their historic role as stable, non-profit, providers of credit,
consequently had to compete with Germany's largest private banks for business. Changes in competition
restructured the German financial system. Mergers and takeovers occurred, especially in commercial
banks and Landesbanks. German financial intermediation ratios-total financial assets of
financial corporations divided by the total financial assets of the economy-increased. Greater securitization
and shadow banking relative to long-term lending increased German propensity for financial crisis,
as securities, shares, and securitized debt constituted increasing percentages of German banks' assets
and liabilities.
Throughout this period, Germany lacked a centralized financial regulatory apparatus. Only in 2002
did the country's central bank, the Bundesbank, establish the Bundenstalt für Finanzdienstleistungsaufsicht
(Federal Financial Supervisory Authority, known as BaFin), which consolidated the responsibilities
of three agencies to oversee the whole financial sector. However, neither institution could keep
pace with new sources of financial and economic instability. German banking changes continued apace
and destabilizing trends in banking grew.
German desire for financial liberalization at the European level, meanwhile, helped increase potential
systemic risk of European finance. Despite some European opposition to removing barriers to capital
and trade flows, Germany prevailed in setting these preconditions for membership in the European
economic union. Germany's negotiating power stemmed from its strong currency, as well as French,
Italian, and smaller European economies' desire for currency stability. Germany demanded an independent
central bank for the union, removal of capital controls, and an expansion of the tasks banks could
perform within the Economic and Monetary Union (EMU). The Second Banking Coordination Directive (SBCD)
mandated that banks perform commercial and investment intermediation to be certified within the EMU;
the Single Market Passport (SMP) required free trade and capital flows throughout the EMU. The SMP
and SBCD increased the scope of activity that financial institutions throughout the union were expected
to provide, and opened banks up to markets, instruments, and activities they could neither monitor
nor regulate, and hence to destabilizing shocks.
Intra-EMU lending and borrowing subsequently increased, and total lending and borrowing grew relative
to European countries' GDP from the early 1990s onward. Asymmetries emerged in capital flows between
Europe's core, particularly the UK, Germany, and the Netherlands, to Europe's newly liberalized periphery.
German banks lent increasing volumes to EMU member states, especially peripheral states. Though this
lending on a country-by-country basis was a small percentage of Germany's GDP, it constituted larger
percentages of borrowers' GDPs. In 2007, Germany lent 1.23% of its GDP to Portugal; this represented
17.68% of Portugal's GDP; in 2008, Germany lent 6% of its GDP to Ireland; this was 84% of Irish GDP.
Germany, the largest European economy, lent larger percentages of its GDP to peripheral EMU nations
relative to its lending to richer European economies. These flows, more potentially disruptive for
borrowers than for the lender, reflected lack of oversight in asset management. German lending helped
destabilize European financial systems more vulnerable to rapid capital inflows, and created conditions
for large-scale capital flight in a crisis.
Financial competition increased in Europe over this period. Financial merger activity first accelerated
within national borders, and later grew at supra-national levels. These movements increased eurozone
access to capital, but increased pressure for banks to widen the scope of the services and lending
that they provided. Rising European securitization in this period increased systemic risk for the
EMU financial system. European holdings of U.S.-originated asset-backed securities increased by billions
of dollars from the early 2000s until shortly before 2008. German banks were among the EMU's top
issuers and acquirers of such assets. As banks' holdings of these assets increased, European systemic
risk increased as well.
European total debt as a percentage of GDP rose in this period. Financial debt relative to GDP
grew particularly sharply in core economies; Ireland was the only peripheral EMU economy with comparable
levels of financial debt. Though government debt relative to GDP fell or held constant for most EMU
nations, cross-border acquisition of sovereign debt increased until 2007. German banks acquired substantially
larger portfolios of sovereign debt issued by other European states, which would not decrease until
2010. Only in 2009 did government debt relative to GDP increase throughout the eurozone, as governments
guaranteed their financial systems to minimize the costs of the ensuing financial crisis.
The newly liberalized financial architecture of the eurozone increased both the market for German
financial services and overall systemic risk of the European financial system; these dynamics helped
destabilize the German financial system and economy at large. Rising German exports of goods, services,
and capital to the rest of Europe grew the German economy, but divergence of current account balances
within the EMU exposed it to sovereign debt risk in peripheral states. Potential systemic risk changed
into systemic risk after the subprime mortgage crisis began. EMU economies would not have subsequently
experienced such pressure to backstop national financial systems or to repay sovereign loans had
German banks not lent so much or purchased so many sovereign bonds within the union. Narratives that
fail to acknowledge Germany's role in promoting the circumstances that underlay the eurozone crisis
ignore the destabilizing power of financial liberalization, even for a global financial center like
Germany.
susan the other, December 3, 2015 at 1:06 pm
This is very interesting. It describes just how the EU mess unfolded beginning in 1970 with
deregulation of the financial industry in the core. Big fish eat little fish. It is as if for
4 decades the banks in Germany compensated their losses to the bigger international lenders by
taking on the riskier borrowers and were able to do so because of German mercantilism and financial
deregulation. Like the German domestic banks loaned the periphery money with abandon, and effectively
borrowed their own profits by speculating on bad customers. As German corporations did business
with big international banksters, who lent at lower rates, other German banks resorted to buying
the sovereign bonds of the periphery and selling CDOs, etc. The German banks were as over-extended
looking for profit as consumers living on their credit cards. Deregulation enriched only the biggest
international banks. We could call this behavior a form of digging your own grave. In 2009 the
periphery saw their borrowing costs threatened and guaranteed their own financial institutions
creating the "sovereign debt" that the core then refused to touch. Hypocrisy ruled. Generosity
was in short supply. The whole thing fell apart. Deregulation was just another form of looting.
washunate, December 3, 2015 at 1:28 pm
German losses on international securitized assets prompted retrenchment of lending, paving
the way for the eurozone's sovereign debt crisis.
I agree with the general conclusion at the end that German financialization is part of the overall
narrative of EMU, but I don't follow this specific link in the chain of events as described. The
eurozone has a sovereign debt crisis because those sovereign governments privatized the profits
and socialized the losses of a global system of fraud. And if we're assigning national blame,
it's a system run out of DC, NY, and London a lot more than Berlin, Frankfurt, and Brussels.
Current and capital account imbalances cancel each other out in the overall balance of payments.
As bank lending decreases (capital account surplus shrinks) then the current account deficit shrinks
as well (the 'trade deficit'). The problem is when governments step in and haphazardly backstop
some of the losses – at least, when they do so without imposing taxes on the wealthy to a sufficient
degree to pay for these bailouts.
The OECD's Base Erosion and Profit Shifting (BEPS) initiative is an effort by the G20 to curb the
abuse of transfer pricing by multinationals.
Senator Hatch is not a fan:
Throughout this process we have heard concerns from large sectors of the business community that
the BEPS project could be used to further undermine our nation's competitiveness and to unfairly
subject U.S. companies to greater tax liabilities abroad. Companies have also been concerned about
various reporting requirements that could impose significant compliance costs on American businesses
and force them to share highly sensitive proprietary information with foreign governments. I expect
that we'll hear about these concerns from the business community and others during today's hearing.
Indeed we heard from some lawyer representing
The Software Coalition who was there to mansplain to us how BEPS is evil. I learned two startling
things. First – Bermuda must be part of the US tax base. Secondly, if Google is expected to pay taxes
in the UK, it will take all those 53,600 jobs which are mainly in California and move them to Bermuda:
in particular how the changes to the international tax rules as developed under BEPS will significantly
reduce the U.S. tax base and create disincentives for U.S. multinational corporations (MNCs) to
create R&D jobs in the United States
Yes – I find his testimony absurd at so many levels. Let's take Google as an example. When they say
foreign subsidiaries – think Bermuda. Over the past three year, Google's income has average $15.876
billion per year but its income taxes have only average $2.933 billion for an effective tax rate
of only 18.5%. How did that happen? Well – 55% of its income is sourced to these foreign subsidiaries
and the average tax rate on this income is only 6.5%. Nice deal! Google's tax model is not only easy
to explain but is also a very common one for those in the Software Coalition. While all of the R&D
is done in the U.S. and 45% of its sales are in the U.S. – U.S. source income is only 45% of worldwide
income. Very little of the foreign sourced income ends up in places like the UK even 11% of Google's
sales are to UK customers. Only problem is that income ends up on Ireland's books with the UK getting
a very modest amount of the profits. Now you might be wondering how Google got to the foreign taxes
to be only 6.5% of foreign sourced income since Ireland's tax rate is 12.5%. But think Double Irish
Dutch Sandwich and you'll get how the profits ended up in Bermuda as well as perhaps a good lunch!
But what about that repatriation tax you ask. Google's most recent 10-K proudly notes:
"We have not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings
of foreign subsidiaries".
In other words, they are not paying that repatriation tax. Besides the Republicans want to eliminate.
Let's be honest – Congress has hamstringed the IRS efforts to enforce transfer pricing. The BEPS
initiative arose out of this failure. And now the Republicans in Congress are objecting to even these
efforts. And if Europe has the temerity of expecting its fair share of taxes, U.S. multinationals
will leave California and relocate in Bermuda? Who is this lawyer kidding?
Myrtle Blackwood
The development model in nation after nation is dependent upon global corporations. What is happening
is simply a byproduct of this.
Would the problem of transfer mythical corporate location and the resulting lost taxes be resolved
if taxes were based on point of revenue? Tax gross income where it is earned instead of taxing
profits where they are not earned.
"... Corruption happen everywhere, just look at US. They merely make it legal to bribe the politician,
it is call lobbying. Look at all those who cheated their clients by selling them CDOs and betting against
them. It became a financial worst crisis for the world, yet none of them was jailed and they all get
to keep the billions. ..."
Corruption happen everywhere, just look at US. They merely make it legal to bribe the politician,
it is call lobbying. Look at all those who cheated their clients by selling them CDOs and betting
against them. It became a financial worst crisis for the world, yet none of them was jailed and
they all get to keep the billions.
Estimate the cost to win 2016 president election = USD 1bn. Even Bush, not a front runner,
had already spend USD30millions. Contribution of fund in return for IOU favors, look like corruption
to me too.
NigelJ, 4 Dec 2015 10:53
some of this anti-corruption campaign would certainly not go amiss in the UK.
TheHighRoad isabey, 4 Dec 2015 09:29
Perhaps the difference is that many academics in the UK are contracted to do a certain number
of hours teaching and must support the university's reputation with research but are also permitted
- contractually - to work in industry and with NGOs to supplement their income and to expand their
knowledge of current practice to make their teaching and research more relevant. It isn't illegal
or even unusual or suspect and if you are envious of it I suggest you spend 8 years working your
way through an ordinary degree, a master's and a doctorate so that you too can participate in
it - though don't get your hopes up for "raking it in".
Oh, and they don't work in a system where corruption investigations are used as a pretext to
weed out "unreliable elements" who talk about dangerous things that might lead impressionable
young people to ask difficult questions about the government in a one-party state.
All this neoliberal talk about "maximizing shareholder value" is designed to hide a
redistribution mechanism of wealth up. Which is the essence of neoliberalism.
It's all about executive pay. "Shareholder value" is nothing then a ruse for
getting outsize bonuses but top execs. Stock buybacks is a form of asset-stripping,
similar to one practiced by buyout sharks, but practiced by internal management team.
Who cares if the company will be destroyed if you have a golden parachute ?
Notable quotes:
"... By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street . ..."
"... IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R D. It's staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. ..."
"... Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R D and capital expenditures. They're all doing it. ..."
"... Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income for the first time in a non-recession period. ..."
"... This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion, against their combined net income of $847 billion. ..."
"... Buybacks and dividends amount to 113% of capital spending among companies that have repurchased shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big driver in a recovery. Not this time! Hence the lousy recovery. ..."
"... Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs. A company buying its own shares creates additional demand for those shares. It's supposed to drive up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also reduce the number of outstanding shares, thus increase the earnings per share, even when net income is declining. ..."
"... But when companies load up on debt to fund buybacks while slashing investment in productive activities and innovation, it has consequences for revenues down the road. And now that magic trick to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered. ..."
"... Me thinks Wolf is slightly barking up the wrong tree here. What needs to be looked at is how buy backs affect executive pay. "Shareholder value" is more often than not a ruse? ..."
"... Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've legalized insider trading or engineered (a) loophole(s). ..."
"... On a somewhat related perspective on subterfuge. The language of "affordability" has proven to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but camouflages the means of embezzling the means of distribution. Isn't distribution, really, the only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement? ..."
"... buybacks *can* be asset-stripping and often are, but unless you tie capital allocation decisions closer to investment in the business such that they're mutually exclusive, this is specious and a reach. No one invests if they can't see the return. It would be just as easy to say that they're buying back stock because revenue is slipping and they have no other investment opportunities. ..."
"... Perhaps an analysis of the monopolistic positions of so many American businesses that allow them the wherewithal to underinvest and still buy back huge amounts of stock? If we had a more competitive economy, companies would have less ability to underinvest. Ultimately, I think buybacks are more a result than a cause of dysfunction, but certainly not always bad. ..."
"... One aspect that Reuters piece mentions, but glosses over with a single paragraph buried in the middle, is the fact that for many companies there are no ( or few) reasons to spend money in other ways. If capex/r d doesn't give you much return, why not buy out the shareholders who are least interested in holding your stock? ..."
"... Dumping money into R D is always risky, although different industries have different levels, and the "do it in-house" risk must be weighed against the costs of buying up companies with "proven" technologies. Thus, R D cash is hidden inside M A. M A is up 2-3 years in a row. ..."
By Wolf Richter, a San Francisco based executive,
entrepreneur, start up specialist, and author, with extensive international
work experience. Originally published at
Wolf Street.
Magic trick turns into toxic mix.
Stocks have been on a tear to nowhere this year. Now investors are
praying for a Santa rally to pull them out of the mire. They're counting on
desperate amounts of share buybacks that companies fund by loading up on
debt. But the magic trick that had performed miracles over the past few
years is backfiring.
And there's a reason.
IBM has blown $125 billion on buybacks since 2005, more than the $111
billion it invested in capital expenditures and R&D. It's staggering under
its debt, while revenues have been declining for 14 quarters in a row. It
cut its workforce by 55,000 people since 2012. And its stock is down 38%
since March 2013.
Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in
the past decade, compared to $82 billion in R&D and $18 billion in capital
spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on
R&D and capital expenditures. They're all doing it.
"Activist investors" – hedge funds – have been clamoring for it. An
investigative report by Reuters, titled
The Cannibalized Company, lined some of them up:
In March, General Motors Co acceded to a $5 billion share buyback to
satisfy investor Harry Wilson. He had threatened a proxy fight if the
auto maker didn't distribute some of the $25 billion cash hoard it had
built up after emerging from bankruptcy just a few years earlier.
DuPont early this year announced a $4 billion buyback program – on top
of a $5 billion program announced a year earlier – to beat back activist
investor Nelson Peltz's Trian Fund Management, which was seeking four
board seats to get its way.
In March, Qualcomm Inc., under pressure from hedge fund Jana Partners,
agreed to boost its program to purchase $10 billion of its shares over
the next 12 months; the company already had an existing $7.8 billion
buyback program and a commitment to return three quarters of its free
cash flow to shareholders.
And in July, Qualcomm announced 5,000 layoffs. It's hard to innovate when
you're trying to please a hedge fund.
CEOs with a long-term outlook and a focus on innovation and investment,
rather than financial engineering, come under intense pressure.
"None of it is optional; if you ignore them, you go away," Russ Daniels,
a tech executive with 15 years at Apple and 13 years at HP, told Reuters.
"It's all just resource allocation," he said. "The situation right now is
there are a lot of investors who believe that they can make a better
decision about how to apply that resource than the management of the
business can."
Nearly 60% of the 3,297 publicly traded non-financial US companies
Reuters analyzed have engaged in share buybacks since 2010. Last year, the
money spent on buybacks and dividends exceeded net income for the first time
in a non-recession period.
This year, for the 613 companies that have reported earnings for fiscal
2015, share buybacks hit a record $520 billion. They also paid $365 billion
in dividends, for a total of $885 billion, against their combined net income
of $847 billion.
Buybacks and dividends amount to 113% of capital spending among companies
that have repurchased shares since 2010, up from 60% in 2000 and from 38% in
1990. Corporate investment is normally a big driver in a recovery. Not this
time! Hence the lousy recovery.
Financial engineering takes precedence over actual engineering in the
minds of CEOs and CFOs. A company buying its own shares creates additional
demand for those shares. It's supposed to drive up the share price. The
hoopla surrounding buyback announcements drives up prices too. Buybacks also
reduce the number of outstanding shares, thus increase the earnings per
share, even when net income is declining.
"Serving customers, creating innovative new products, employing workers,
taking care of the environment … are NOT the objectives of firms," sais Itzhak
Ben-David, a finance professor of Ohio State University, a buyback
proponent, according to Reuters. "These are components in the process that
have the goal of maximizing shareholders' value."
But when companies load up on debt to fund buybacks while slashing
investment in productive activities and innovation, it has consequences for
revenues down the road. And now that magic trick to increase shareholder
value has become a toxic mix. Shares of buyback queens are getting hammered.
Citigroup credit analysts looked into the extent to which this is
happening – and why. Christine Hughes, Chief Investment Strategist at
OtterWood Capital, summarized the Citi report this way: "This
dynamic of borrowing from bondholders to pay shareholders may be coming to
an end…."
Their chart (via OtterWood Capital) shows that about half of the
cumulative outperformance of these buyback queens from 2012 through 2014 has
been frittered away this year, as their shares, IBM-like, have swooned:
Mbuna, November 21, 2015 at 7:31 am
Me thinks Wolf is slightly barking up the wrong tree here. What needs to be
looked at is how buy backs affect executive pay. "Shareholder value" is more
often than not a ruse?
ng, November 21, 2015 at 8:58 am
probably, in some or most cases, but the effect on the stock is the same.
Alejandro, November 21, 2015 at 9:19 am
Interesting that you mention ruse, relating to "buy-backs"…from my POV,
it seems like they've legalized insider trading or engineered (a) loophole(s).
On a somewhat related perspective on subterfuge. The language of
"affordability" has proven to be insidiously clever. Not only does it reinforce
and perpetuate the myth of "deserts", but camouflages the means of embezzling
the means of distribution. Isn't distribution, really, the only rational
purpose of finance, i.e., as a means of distribution as opposed to a means of
embezzlement?
Jim, November 21, 2015 at 10:42 am
More nuance and less dogma please. The dogmatic tone really hurts what could
otherwise be a fine but more-qualified position.
"Results of all this financial engineering? Revenues of the S&P 500
companies are falling for the fourth quarter in a row – the worst such spell
since the Financial Crisis."
Eh, no. No question that buybacks *can* be asset-stripping and often
are, but unless you tie capital allocation decisions closer to investment in
the business such that they're mutually exclusive, this is specious and a
reach. No one invests if they can't see the return. It would be just as easy to
say that they're buying back stock because revenue is slipping and they have no
other investment opportunities.
Revenues are falling in large part because these largest companies derive an
ABSOLUTELY HUGE portion of their business overseas and the dollar has been
ridiculously strong in the last 12-15 months. Rates are poised to rise, and the
easy Fed-inspired rate arbitrage vis a vis stocks and "risk on" trade are
closing. How about a little more context instead of just dogma?
John Malone made a career out of financial engineering, something like 30%
annual returns for the 25 years of his CEO tenure at TCI. Buybacks were a huge
part of that.
Perhaps an analysis of the monopolistic positions of so many American
businesses that allow them the wherewithal to underinvest and still buy back
huge amounts of stock? If we had a more competitive economy, companies would
have less ability to underinvest. Ultimately, I think buybacks are more a
result than a cause of dysfunction, but certainly not always bad.
NeqNeq, November 21, 2015 at 11:44 am
One aspect that Reuters piece mentions, but glosses over with a single
paragraph buried in the middle, is the fact that for many companies there are
no ( or few) reasons to spend money in other ways. If capex/r&d doesn't give
you much return, why not buy out the shareholders who are least interested in
holding your stock?
Dumping cash into plants only makes sense in the places where the market is
growing. For many years that has meant Asia (China). For example, Apple gets
66% (iirc) of revenue from Asia, and that is where they have continued
investing in growth. If demand is slowing and costs are rising, and it looks
like both are true, why would you put even more money in?
Dumping money into R&D is always risky, although different industries have
different levels, and the "do it in-house" risk must be weighed against the
costs of buying up companies with "proven" technologies. Thus, R&D cash is
hidden inside M&A. M&A is up 2-3 years in a row.
"... Is what you're saying here is that, by extending a lot of credit, the financial sector allowed households to maintain consumption in the face of a permanent decline in income (at least relative to expectation)? That's an important part of the story, I agree. ..."
"... the FIRE sector in particular, are parasitic on the economy. ..."
"... Perhaps financialization isn't so much a thing-in-itself as the mechanism through which wealth concentrates in periods of slow growth? ..."
"... As in the official theory of efficient markets, the financial sector is actually earning its keep by allocating capital to the most productive investments, and by spreading and managing risk. I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles and busts." ..."
"... Did Cuba, Venezuela, Argentina and North Korea do better than the financialized economies of the world? Did the hand of the State in Russia, China and other countries secure better outcomes than the global financial sector in countries that allowed it to operate (albeit with heavy regulation)? ..."
"... The financial system can engage in usury, lending money with no connection to productive investment, by simply creating a parasitic claim on income. There are straightforward ways of doing this: credit cards with high rates of interest or payday lending. There are slightly more complicated approaches: insurance that by design doesn't pay off for the nominal beneficiary. ..."
"... "The biggest economic policy decision of the last thirty years has been the decision to de-socialise a lot of previously socially insured risks and transfer them back to the household sector (in their various capacities as workers, homeowners and consumers of healthcare). The financial sector was obviously the conduit for this policy decision." ..."
"... My feeling (based on nothing but intuition) is that the answer is (d). The government is a tool of moneyed interests. I know, it sounds awfully libertarian, but it is what it is. And I can't foresee any non-catastrophic end to it. ..."
The financialization of the global economy has produced a hugely costly financial sector, extracting
returns that must, in the end, be taken out of the returns to investment of all kinds. The costs
were hidden during the pre-crisis bubble era, but are now evident to everyone, including potential
investors. So, even massively expansionary monetary policy doesn't produce much in the way of
new private investment.
This isn't an original idea. The Bank of International Settlements put out a paper earlier this year
arguing that financial sector growth
crowds out real growth. But how does this work and what can be done about it? I'm still organizing
my thoughts on this, so what I have are some ideas rather than a fully formed argument.
First, if the financial sector is unproductive, how can it be so large and profitable in a market
economy?
There are a few possible explanations
(a) As in the official theory of efficient markets, the financial sector is actually earning its
keep by allocating capital to the most productive investments, and by spreading and managing risk.
I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles
and busts.
(b) Tax evasion: the global financial sector allows corporations to greatly reduce their tax liabilities.
Most of the savings in tax is captured in the financial sector itself, but the amount flowing to
corporations is sufficient to offset the high costs of the modern financial sector, relative to (for
example) old-style bank finance and simple corporate structures financed by debt and equity
(c) Volatility: the financialization of the economy has produced greatly increased volatility (in
exchange rates, asset prices and so on). The financial sector amplifies and profits from this volatility,
partly through
regulatory arbitrage, and partly through entrenched and systematic fraud as in the
LIBOR and
Forex scandals.
(d) Political capture: The financial sector controls political outcomes in both traditional ways
(political donations, highly revolving door jobs for future and former politicians) and through the
ideology of market liberalism, which is perfectly designed to support policies supporting the financial
sector, while discrediting policies traditionally sought by other parts of the corporate sector,
such as protection for manufacturing industry. The shift to private finance for infrastructure, discussed
in the previous post is part of this. The construction part of the infrastructure sector (which was
always private) has suffered from the reduced flow of projects, but the finance part (previously
managed through government bonds) has
benefited massively.
The result of all this is that the financial sector benefits from an evolutionary strategy similar
to that of an Australian eucalypt forest. Eucalypts are both highly flammable (they generate lots
of combustible oil) and highly fire resistant. So eucalypt forests are subject to frequent fires
which kill competing species, and allow the eucalypts to extend their range.
dsquared 11.29.15 at 1:24 pm
Surely the answer is "risk transfer". The biggest economic policy decision of the last thirty years
has been the decision to de-socialise a lot of previously socially insured risks and transfer them
back to the household sector (in their various capacities as workers, homeowners and consumers of
healthcare). The financial sector was obviously the conduit for this policy decision. Their role
is to provide insurance to the rest of society and this is what they did – in fact, they provided
too much of it, with too little capital which is why they went bust, and why their bankruptcy was
so disastrous (there's nothing worse than an insurer bankruptcy, because it hits you with a big loss
at exactly the worst time). I think c) above is particularly unconvincing, as the biggest stylised
feature of the period of financialisation was the Great Moderation – in fact, the financial sector
stored up volatility that would otherwise have been experienced by other people, including the intermediation
of some genuinely historically massive imbalances associated with the industrialisation of China,
and stored it up until it couldn't hold any more and exploded.
I also don't think LIBOR and FX
fit into that pattern at all very well either. Financial systems have two kinds of problem, which
is why they often have two kinds of regulators. They have prudential problems and conduct problems.
Both LIBOR and FX were old-fashioned profiteering and cartel arrangements, which could happen in
any industry (hey let's talk about drug pricing and indeed university tuition some time). In actual
fact, as I wrote a while ago, it's only LIBOR that can really be considered a scandal – FX was very
much more a case of customers who wanted the benefits of tight regulation but didn't want to pay
for them, and were lucky enough to find a political moment in which the time was right for an otherwise
very unpromising case.
In other words, the answer to all your questions is "leverage". That's why financial systems grew
so fast, that's why they're associated with poor economic performance, and that's why they tend to
show up in periods of secular stagnation – a secular stagnation is almost defined as a period during
which people try to maintain their standard of living by borrowing. Of course, if the financial sector
had been required to hold enough equity capital in the first place, it would never have grown so
big in the first place, and we could all be enjoying the thirteenth year of the post-dot-com bust[1]
in relative contentment.
[1] I am never going to shut up about this. The real estate bubble was a policy-created bubble.
It was blown up in real time and intentionally, by a Federal Reserve which wanted to cushion the
blow of the tech bust. If the financial sector had refused to finance it, the financial sector would
have been trying to run a monetary policy directly opposed to that of the central bank.
I agree that risk transfer is a big deal. On the other hand, it's not obvious that the financial
sector did a lot to insure households against most of the additional risk, or that the Great Moderation
corresponded to a reduction in the volatility faced by households. On the first point, despite massive
financial innovation since 1980, the set of financial instruments easily available to households
hasn't changed all that much. Most obviously, there's no insurance against bad employment and wage
outcomes and home equity insurance hasn't really happened either.
Is what you're saying here
is that, by extending a lot of credit, the financial sector allowed households to maintain consumption
in the face of a permanent decline in income (at least relative to expectation)? That's an important
part of the story, I agree.
The secular stagnation framing of the question leads me to think more about why investment hasn't
responded to monetary policy rather than directly about households.
Yeah, that's my point – the massive extension of credit to households was the financial sector's
role in the big policy shift. At the end of the day, although we might with the benefit of hindsight
agree that "subprime mortgages with no income verification at teaser rates" were a pretty stupid
product that should never have been offered, they were a brand new financial product that had never
been offered to households before! Even the example you mention – "insurance against bad employment
and wage outcomes" – was sort of sold, albeit that what I'm referring to here is Payment Protection
Insurance in the UK, which sort of underlines that it wasn't done well or responsibly.
I guess
my argument here is that it's the combination of deregulation and stagnation that was necessary to
create the 2000s policy disaster. But if we hadn't had the bad products we got, we'd have had something
else go wrong, probably outside the regulated sector. Because the high debt levels were a policy
goal (or at least, were the inevitable and forseeable consequence of trying to do demand management
without fiscal policy), and as I keep saying in different contexts, you can't get to a stupid debt
ratio by only doing sensible things.
The secular stagnation framing of the question leads me to think more about why investment
hasn't responded to monetary policy rather than directly about households.
Isn't the answer to this just the definition of a Keynesian recession? Investment hasn't responded
to monetary policy because there's no interest rate at which it makes sense to produce goods that
can't be sold.
Capital generally, and the FIRE sector in particular, are parasitic on the economy. They provide
some minimal benefits if kept strongly in check, but quickly become destructive if allowed to grow
unchecked, as they have now.
Dumb outsider thought, turning Eggplant @6 upside down: What about r > g? Perhaps financialization
isn't so much a thing-in-itself as the mechanism through which wealth concentrates in periods of
slow growth?
"But if we hadn't had the bad products we got, we'd have had something else go wrong, probably outside
the regulated sector."
A more sophisticated version of the widely debunked theory that Fannie and
Freddie blew up the housing sector by giving loans to poor people. Rule 1: It's never ever the bankers'
fault. Rule 2: see Rule 1. At least d-squared has been consistent…
Which direction is financialization heading? It looks to be decreasing. The mutual fund industry
is in terminal decline, losing market share to ETFs. There are fewer financial advisors today than
in 2008, yet the number of millionaires has increased. Stock trading has broken a 40 year trend of
increasing volumes. Electronic and exchange trading of bonds and derivatives is increasing, driving
down margins. Bots have driven human traders out of jobs (Dark Pools has a good account of this).
Banks are earnings low single digit returns in their trading divisions, which suggests they will
be shut down if things don't improve. It looks like finance is doing a good job of shrinking itself,
with a little help from Elizabeth Warren.
There were several issues and arguments posed in the OP. I'm addressing this:
"First, if the financial
sector is unproductive, how can it be so large and profitable in a market economy?
There are a few possible explanations
(a) As in the official theory of efficient markets, the financial sector is actually earning its
keep by allocating capital to the most productive investments, and by spreading and managing risk.
I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles
and busts."
D-squared response is of course it's the risk transfer. That flat out contradicts JQ, but d-squared
is a master of the straight face. And then he proceeds - "there has been a decision to desocilaize";
"the financial sector was obviously the conduit for this policy decision"; and "the real estate bubble
was a policy-created bubble."
So JQ, here's your answer of FIRE's ascendancy from an insider: You know me and my friends were
standing around just doing nothin' and then these policy guys come around. Next thing ya know, we've
doubled our share of GDP and put our bosses in the top 0.01%. Who woulda known? Crazy shit, huh?
Hey and if anyone asks, tell 'um "risk transfer." And if they press, tell 'um "secular stagnation."
In fact, tell 'um frickin' anything. It just wasn't our fault.
I know that I shall have to read John Kay's Other People's Money at some point.
I am wondering what people make of the old the then Marxist Hilferding's concept of promoters' profit
as a way to understand some financial sector activity. I posted this here a few years back.
Here's his example, and I am trying to figure out to the extent that it throws light on the recent
activity of Wall Street.
Start with an industrial firm with a capital of 1,000,000 marks that makes a profit of 150,000
marks with the average profit of 15 percent.
With an interest rate of 5% straight capitalization of income of 150,000 marks will have an estimated
price of 3,000,000 marks (150,000/.05=3,000,000 marks)
A deduction of 20,000 marks for the various administration costs and directors fees would make
the actual payment to shareholders 130,000 rather 150,000 marks
A risk premium of, say, 2% would be added to a fixed safe rate of interest of 5% in estimating
the actual stock price
So what, then, is the stock price (130,000/.07)? 1,857,143 or roughly 1,900.000 marks
This 900,000 is free after deducting the initial investment of 1,000,000 marks
The balance of 900, 000 marks appears as promoters' profit which arises from the conversion of
profit-bearing capital into interest bearing capital.
In 1910, Hilferding called this promoters profit, an economic category sui generis; it is earned
by the promoter by selling of stocks or the securitizing of income on the capital market.
For Hilferding the investment bank, which promotes the conversion of profit-bearing to interest-bearing
capital, claims the promoters profit.
The analysis seems pertinent to the securitization process today, and I would love to hear Henwood's
and others' thoughts about this.
As Roubini and Mihm have pointed out, we have seen the securitization of mortgages, consumer loans,
student loans, auto loans, airplane leases, revenues from forests and mines, delinquent tax liens,
radio tower loans, boat loans, state revenues, the royalties of rock bands!
We have seen, in their words, an explosion in the selling of future income of dependable projected
revenue streams such as rents or interest payments on mortgage payments as securities.
That securitization been driven by investors' quest for yield lift given the low rate of interest,
itself the result of the global savings glut and Fed policy.
And it seems that Wall Street, with the connivance of the credit agencies, was able to appropriate
value from the purchasers of securities by understating the risk premia.
The risk premium and promoters' profit are inversely correlated so there is a strong incentive
to understate the former. This is what Hilferding did not say, but seems worth emphasizing today.
I sincerely do not understand your point here. I'm not arguing, just asking for clarification:
(a) As in the official theory of efficient markets, the financial sector is actually earning its
keep by allocating capital to the most productive investments, and by spreading and managing risk.
I don't see how anyone can argue this with a straight face in the light of the last 20 years of bubbles
and busts.
For one thing, I don't see that the two bubbles and one bust of 1996 – 2015 are self-evidently
worse than the more numerous bubbles and busts of 1976 – 1995. You might say the 2008 brush with
Great Depression outweighs the hyperinflation and multiple deep recessions of the earlier era, but
certainly the Internet and housing bubbles were more productive and less threatening than the commodity,
Japan, emerging debt and other bubbles. Anyway, it's a close enough comparison that someone could
certainly keep a straight face while saying that in the last 20 years financial volatility inflicted
less real economic damage than in the preceding 20 years.
But the bigger issue is no one claims the financial system encourages steady growth. Creative
(bubble) destruction (bust) is the rule. It is command economies that outlaw bubbles and busts–and
inflation and unemployment–at the cost of unproductive employment, empty shelves, stifled innovation,
loss of freedom and other consequences.
If you want to argue that the financial system did not earn its profits in the last 20 years,
it seems to me you have to argue that economic growth was slow, or that more people in the world
are in poverty today, or that there was not enough innovation; not that the ride was too volatile.
Did Cuba, Venezuela, Argentina and North Korea do better than the financialized economies of the
world? Did the hand of the State in Russia, China and other countries secure better outcomes than
the global financial sector in countries that allowed it to operate (albeit with heavy regulation)?
It is certainly possible to argue that we could have had more growth and innovation and poverty
reduction; and less volatility; with some third way that's better than both our current financial
system and the alternatives practiced in the world today. But that point is not so obvious that any
defender of the global financial system must be joking.
Why do you think the booms and busts of the last 20 years are such a clear and damning indictment
of the financial system that the point needs no further elaboration?
The financial system can engage in usury, lending money with no connection to productive investment,
by simply creating a parasitic claim on income. There are straightforward ways of doing this: credit
cards with high rates of interest or payday lending. There are slightly more complicated approaches:
insurance that by design doesn't pay off for the nominal beneficiary.
There are really complicated
ways of doing this: derivatives, for example, which blow up (and as an added bonus, undermine the
informational efficiency of financial markets).
I keep thinking of Piketty's r > g: the ever-accumulating pile of money rising like a slow, but
unstoppable tide. It has to be invested or "invested" - that is, it can buy the assembly of resources
into productive capital assets that represent financial claims on the additional income generated
by business innovation and expansion . . . OR . . . it can be used to finance the parasitic and predatory
manipulations of an emergent neo-feudalism.
Where the secular stagnation thesis is not pure apologetic fraud, I would interpret it as saying,
there are currently few opportunities to invest in additional productive "real" capital stock. For
technological reasons, the new systems require much less capital than the old systems, so when an
old telephone company replaces its expensive copper wire with fiber optics and cellphone towers,
it may be able to fund a large part of the transition out of current cash-flow, even while maintaining
the value of the bonds that once represented investment in a mountain of copper, but are now just
rentier claims on an obsolete world.
In the brave new world, a handful of companies, who have lucked into commercial positions with
high rents, throw off a lot of cash. So, the Apples and Intels do not need to be allocated new capital,
but their distribution of cash to people who don't need it, is generating a lot of demand for "financial
product". The rest of the business world is just trying to manage a slow decline, able to throw off
modest amounts of cash, desperate to find sources of political power that might yield reliable rents,
but without opportunities to innovate that would actually require net investment in excess of current
cashflows from operations.
So, the financial system is just responding to this enlarged demand for non-productive investment
in financial products that generate return from parasitic extraction.
In the interest of parasitic extraction, the financial system pursues the politics of neoliberal
privatization as a means of generating financial products to satisfy demand.
re volatility, the thing you really want to worry about is liquidity. Pre-crash banks could warehouse
risk and so provide liquidity. One consequence was volatility was recorded because liquid markets
allowed prices to be observed.
Regulators have observed the conflict of interest caused by banks
providing a financial service but also participating in the markets with their own money, and have
acted to restrict banks from holding risk for proprietary trading (the Volcker rule). This is fine,
but there has been a noticeable decrease in liquidity in what were once deep markets. The EURCHF
un-pegging in Jan this year is a good example of reduced liquidity resulting in a massive move. There
may well be more of this to come.
"The biggest economic policy decision of the last thirty years has been the decision to de-socialise
a lot of previously socially insured risks and transfer them back to the household sector (in their
various capacities as workers, homeowners and consumers of healthcare). The financial sector was
obviously the conduit for this policy decision."I can't tell if you are arguing with John or agreeing
with him. Is this agreement with his d) [the political capture explanation]? I don't know very much
about the deep history of financial regulation, but I'm fairly certain that most voters have never
put desocialization of risk in their top 5 concerns. Is it possible that the financial sector was
the obvious conduit because they were among the important authors of the ideas?
In my opinion, finance had a passive role in the build
up of the crisis.
Others have said similar things uptread, however this is my opinion:
1) the wage share of GDP depends largely on political choices; since the late seventies there
has been a trend of a falling wage share more or less everywhere, as countries with a lower wage
share are more competitive on the world market.
2) a falling wage share means a rising profit share, and "capitalists" tend to reinvest part of their
profits, so a falling wage share caused a worldwide saving glut.
3) this worldwide saving glut caused an increased financialisation and a bubbling up of the price
of some assets, particularly those assets whose supply is inelastic (for example, the value of distribution
chains or of famous consumer brands).
4) this in turn causes an increased volatility of financial markets, and worse financial crises.
This situation is what we perceive as a secular stagnation, and IMHO depends mostly on a low worldwide
wage share.
Unfortunately, I have no idea of how to reach an higher wage share, and I don't think "the market"
has any mechanism to push up said wage share.
Bruce,
What you are saying makes sense to me. Steven Pressman has also raised the question of how r is to
be maintained with "an abundance of capital and its need for high rates of return." (Understanding
Piketty's Capital in the Twenty First Century).
It's almost as if Piketty in his criticism of the rentier has a rentier's disregard for how the returns
are actually to be made. To the extent that he considers production it is through marginal productivity
theory. Piketty claims that marginal rate of substitution of capital for labor will remain above
unity (and too bad Piketty dismissed the Cambridge Capital critique because Ian Steedman has used
Sraffian theory to show the possibilities of high profits in even a fully automated economy).
Of course as Pressman implies, this "technical" view may blind us to the higher exploitation that
may be necessary for returns to continue to remain high as capital becomes more abundant. Pressman
also implies that Piketty also does not consider how finance can make higher rates of return by making
higher-interest loans to weaker parties while having them absorb most of the risk (this would be
your second kind of investment).
" I don't know very much about the deep history of financial regulation, but I'm fairly certain that
most voters have never put desocialization of risk in their top 5 concerns."
Of course not, but
there are actors here other than "the public" and "the banks". In this case, I'm pretty sure Daniel
is referring to the destruction of unionized middle class jobs with pensions and cheap-to-the-worker
health insurance, which was carried out by their employers. While I doubt I could pick a bank owner
out of a lineup filled out with captains of industry, they aren't actually interchangeable.
"Of course, if the financial sector had been required to hold enough equity capital
in the first place, it would never have grown so big in the first place, and we could all be enjoying
the thirteenth year of the post-dot-com bust[1] in relative contentment."
Secular stagnation to me just means not enough macro (monetary/fiscal) policy to keep up aggregate
demand for full employment and target inflation.
Monetary and fiscal policy is being blocked by politics partly because filthy rich financiers
are buying their way into politics:
The question about Dsquare's alternate history I would have is: what is the response of fiscal
and monetary policy to the "domestication" of the financial sector via higher capital requirements
and leverage regulations, etc.?
If fiscal and monetary policy keeps the economy at a high-pressure level with full employment
and rising wages, I don't see why secular stagnation is a problem.
But politics is blocking fiscal and monetary policy. Professor Quiggin talks of "massive" monetary
policy, but it wasn't massive given the need. (It was massive compared to past recoveries.) It was
big enough to avoid deflation despite unprecedented fiscal austerity. It wasn't big enough to hit
their inflation target in a timely matter.
My feeling (based on nothing but intuition) is that the answer is (d). The government is a tool of
moneyed interests. I know, it sounds awfully libertarian, but it is what it is. And I can't foresee
any non-catastrophic end to it.
"... In reality, this perception is misleading; not that Kerry is a warmonger on the level of George W. Bush's top staff, such as Vice-President Dick Cheney and Secretary of Defense, Donald Rumsfeld. The two were the very antithesis of any rational foreign policy such that even the elder George H. W. Bush described them with demeaning terminology , according to his biographer, quoted in the New York Times . Cheney was an "Iron-ass", who "had his own empire … and marched to his own drummer," H.W. Bush said, while calling Rumsfeld "an arrogant fellow" who lacked empathy. Yet, considering that the elder Bush was rarely a peacemaker himself, one is left to ponder if the US foreign policy ailment is centered on failure to elect proper representatives and to enlist anyone other than psychopaths? ..."
"... comparing the conduct of the last three administrations, that of Bill Clinton, George W. Bush and Barack Obama, one would find that striking similarities are abundant. In principle, all three administrations' foreign policy agendas were predicated on strong militaries and military interventions, although they applied soft power differently. ..."
"... In essence, Obama carried on with much of what W. Bush had started in the Middle East, although he supplanted his country's less active role in Iraq with new interventions in Libya and Syria. In fact, his Iraq policies were guided by Bush's final act in that shattered country, where he ordered a surge in troops to pacify the resistance, thus paving the way for an eventual withdrawal. Of course, none of that plotting worked in their favor, with the rise of ISIS among others, but that is for another discussion. ..."
"... In other words, US foreign policy continues unabated, often guided by the preponderant norm that "might makes right", and by ill-advised personal ambitions and ideological illusions like those championed by neo-conservatives during W. Bush's era. ..."
"... The folly of W. Bush, Cheney and company is that they assumed that the Pentagon's over $1.5 billion-a-day budget was enough to acquire the US the needed leverage to control every aspect of global affairs, including a burgeoning share of world economy. ..."
"... The Russian military campaign in Syria, which was halfheartedly welcomed by the US. has signaled a historic shift in the Middle East. Even if Russia fails to turn its war into a major shift of political and economic clout, the mere fact that other contenders are now throwing their proverbial hats into the Middle East ring, is simply unprecedented since the British-French-Israeli Tripartite Aggression on Egypt in 1956. ..."
"... It will take years before a new power paradigm fully emerges, during which time US clients are likely to seek the protection of more dependable powers. In fact, the shopping for a new power is already under way, which also means that new alliances will be formed while others fold. ..."
US Secretary of State, John Kerry, is often perceived as one of the "good ones" – the less hawkish
of top American officials, who does not simply promote and defend his country's military adventurism
but reaches out to others, beyond polarizing rhetoric.
His unremitting efforts culminated partly in the Iran nuclear framework agreement in April,
followed by a final deal, a few months later. Now, he is reportedly hard at work again to find
some sort of consensus on a way out of the Syria war, a multi-party conflict that has killed over
300,000 people. His admirers see him as the diplomatic executor of a malleable and friendly US foreign
policy agenda under President Obama.
In reality, this perception is misleading; not that Kerry is a warmonger on the level of George
W. Bush's top staff, such as Vice-President Dick Cheney and Secretary of Defense, Donald Rumsfeld.
The two were the very antithesis of any rational foreign policy such that even the elder George H.
W. Bush
described them with demeaning terminology, according to his biographer, quoted in the New
York Times. Cheney was an "Iron-ass", who "had his own empire … and marched to his own
drummer," H.W. Bush said, while calling Rumsfeld "an arrogant fellow" who lacked empathy. Yet, considering
that the elder Bush was rarely a peacemaker himself, one is left to ponder if the US foreign policy
ailment is centered on failure to elect proper representatives and to enlist anyone other than psychopaths?
If one is to fairly examine US foreign policies in the Middle East, for example, comparing
the conduct of the last three administrations, that of Bill Clinton, George W. Bush and Barack Obama,
one would find that striking similarities are abundant. In principle, all three administrations'
foreign policy agendas were predicated on strong militaries and military interventions, although
they applied soft power differently.
In essence,
Obama carried on with much of what W. Bush had started in the Middle East, although he supplanted
his country's less active role in Iraq with new interventions in Libya and Syria. In fact, his Iraq
policies were guided by Bush's final act in that shattered country, where he ordered a surge in troops
to pacify the resistance, thus paving the way for an eventual withdrawal. Of course, none of that
plotting worked in their favor, with the rise of ISIS among others, but that is for another discussion.
Obama has even gone a step further when
he recently decided to keep thousands of US troops in Afghanistan well into 2017, thus breaking
US commitment to withdraw next year. 2017 is Obama's last year in office, and the decision is partly
motivated by his administration's concern that future turmoil in that country could cost his Democratic
Party heavily in the upcoming presidential elections.
In other words, US foreign policy continues unabated, often guided by the preponderant norm
that "might makes right", and by ill-advised personal ambitions and ideological illusions like those
championed by neo-conservatives during W. Bush's era.
Nevertheless, much has changed as well, simply because American ambitions to police the world,
politics and the excess of $600 billion a year US defense budget are not the only variables that
control events in the Middle East and everywhere else. There are other undercurrents that cannot
be wished away, and they too can dictate US foreign policy outlooks and behavior.
Indeed, an
American decline has been noted for many years, and Middle Eastern nations have been more aware
of this decline than others. One could even argue that the W. Bush administration's rush for war
in Iraq in 2003 in an attempt at controlling the region's resources, was a belated effort at staving
off that unmistakable decay – whether in US ability to regulate rising global contenders or in its
overall share of global economy.
The folly of W. Bush, Cheney and company is that they assumed that the Pentagon's over $1.5
billion-a-day budget was enough to acquire the US the needed leverage to control every aspect of
global affairs, including a burgeoning share of world economy. That misconception carries on
to this day, where military spending is
already accounting for about 54 percent of all federal discretionary spending, itself nearly
a third of the country's overall budget.
However, those who are blaming Obama for failing to leverage US military strength for political
currency refuse to accept that Obama's behavior hardly reflects a lack of appetite for war, but a
pragmatic response to a situation that has largely spun out of US control.
The so-called "Arab Spring", for example, was a major defining factor in the changes of US fortunes.
And it all came at a particularly interesting time.
First, the Iraq war has destroyed whatever little credibility the US had in the region, a sentiment
that also reverberated around the world.
Second, it was becoming clear that the US foreign policy in Central and South America – an obstinate
continuation of the
Monroe Doctrine of
1823, which laid the groundwork for US domination of that region – has also been challenged by
more assertive leaders, armed with democratic initiatives, not military coups.
Third,
China's more forceful politics, at least around its immediate regional surroundings, signaled
that the US traditional hegemony over most of East and South East Asia are also facing fierce competition.
Not only many Asian and other countries have flocked to China, lured by its constantly growing
and seemingly more solid economic performance, if compared to the US, but others are also
flocking to Russia, which is filling a political and, as of late, military vacuum left open.
The Russian military campaign in Syria,
which was halfheartedly welcomed by the US. has signaled a historic shift in the Middle East.
Even if Russia fails to turn its war into a major shift of political and economic clout, the mere
fact that other contenders are now throwing their proverbial hats into the Middle East ring, is simply
unprecedented since the British-French-Israeli Tripartite Aggression on Egypt in 1956.
The region's historians must fully understand the repercussions of all of these factors, and that
simply analyzing
the US decline based on the performance of individuals – Condoleezza Rice's hawkishness vs. John
Kerry's supposed sane diplomacy – is a trivial approach to understanding current shifts in global
powers.
It will take years before a new power paradigm fully emerges, during which time US clients
are likely to seek the protection of more dependable powers. In fact, the shopping for a new power
is already under way, which also means that
new alliances will be formed while others fold.
For now, the Middle East will continue to pass through this incredibly difficult and violent transition,
for which the US is partly responsible.
"... In the real world most credit today is spent to buy assets already in place, not to create new productive capacity. Some 80 percent of bank loans in the English-speaking world are real estate mortgages, and much of the balance is lent against stocks and bonds already issued. ..."
"... Debt-leveraged buyouts and commercial real estate purchases turn business cash flow (ebitda: earnings before interest, taxes, depreciation and amortization) into interest payments. Likewise, bank or bondholder financing of public debt (especially in the Eurozone, which lacks a central bank to monetize such debt) has turned a rising share of tax revenue into interest payments. ..."
"... even government tax revenue is diverted to pay debt service ..."
"... Contemporary evidence for major OECD economies since the 1980s shows that rising capital gains may indeed divert finance away from the real sector's productivity growth (Stockhammer 2004) and more generally that 'financialization' (Epstein 2005) has hurt growth and incomes. Money created for capital gains has a small propensity to be spent by their rentier owners on goods and services, so that an increasing proportion of the economy's money flows are diverted to circulation in the financial sector. Wages do not increase, even as prices for property and financial securities rise – just the well-known trend that we have seen in the Western world since the 1970s, and which persists into the post-2001 Bubble Economy. ..."
Incorporating the Rentier Sectors into a Financial Model
Wednesday, September
12, 2012
by Dirk Bezemer and Michael Hudson
As published in the World Economic Association's World Economic Review Vol #1.
.......
2. Finance is not The economy
In the real world most credit today is spent to buy assets already in place, not to create
new productive capacity. Some 80 percent of bank loans in the English-speaking world are real estate
mortgages, and much of the balance is lent against stocks and bonds already issued.
Banks lend to buyers of real estate, corporate raiders, ambitious financial empire-builders, and
to management for debt-leveraged buyouts. A first approximation of this trend is to chart the share
of bank lending that goes to the 'Fire, Insurance and Real Estate' sector, aka the nonbank financial
sector. Graph 1 shows that its ratio to GDP has quadrupled since the 1950s. The contrast is with
lending to the real sector, which has remained about constant relative to GDP. This is how our debt
burden has grown.
Graph 1: Private debt growth is due to lending to the FIRE sector: the US, 1952-2007
Source: Bezemer (2012) based on US flow of fund data, BEA 'Z' tables.
What is true for America is true for many other countries: mortgage lending and other household
debt have been 'the final stage in an artificially extended Ponzi Bubble' as Keen (2009) shows for
Australia. Extending credit to purchase assets already in place bids up their price. Prospective
homebuyers need to take on larger mortgages to obtain a home. The effect is to turn property rents
into a flow of mortgage interest. These payments divert the revenue of consumers and businesses from
being spent on consumption or new capital investment. The effect is deflationary for the economy's
product markets, and hence consumer prices and employment, and therefore wages. This is why we had
a long period of low cpi inflation but skyrocketing asset price inflation. The two trends are linked.
Debt-leveraged buyouts and commercial real estate purchases turn business cash flow (ebitda: earnings
before interest, taxes, depreciation and amortization) into interest payments. Likewise, bank or
bondholder financing of public debt (especially in the Eurozone, which lacks a central bank to monetize
such debt) has turned a rising share of tax revenue into interest payments.
As creditors recycle
their receipts of interest and amortization (and capital gains) into new lending to buyers of real
estate, stocks and bonds, a rising share of employee income, real estate rent, business revenue and
even government tax revenue is diverted to pay debt service. By leaving less to spend on goods and
services, the effect is to reduce new investment and employment.
Contemporary evidence for major
OECD economies since the 1980s shows that rising capital gains may indeed divert finance away from
the real sector's productivity growth (Stockhammer 2004) and more generally that 'financialization'
(Epstein 2005) has hurt growth and incomes. Money created for capital gains has a small propensity
to be spent by their rentier owners on goods and services, so that an increasing proportion of the
economy's money flows are diverted to circulation in the financial sector. Wages do not increase,
even as prices for property and financial securities rise – just the well-known trend that we have
seen in the Western world since the 1970s, and which persists into the post-2001 Bubble Economy.
It is especially the case since 1991 in the post-Soviet economies, where neoliberal (that is,
pro-financial) policy makers have had a free hand to shape tax and financial policy in favor of banks
(mainly foreign bank branches). Latvia is cited as a neoliberal success story, but it would be hard
to find an example where rentier income and prices have diverged more sharply from wages and the
"real" production economy.
The more credit creation takes the form of inflating asset prices – rather than financing purchases
of goods and services or direct investment employing labor – the more deflationary its effects are
on the "real" economy of production and consumption. Housing and other asset prices crash, causing
negative equity. Yet homeowners and businesses still have to pay off their debts. The national income
accounts classify this pay-down as "saving," although the revenue is not available to the debtors
doing the "saving" by "deleveraging."
The moral is that using homes as what Alan Greenspan referred to as "piggy banks", to take out
home-equity loans, was not really like drawing down a bank account at all. When a bank account is
drawn down there is less money available, but no residual obligation to pay. New income can be spent
at the discretion of its recipient. But borrowing against a home implies an obligation to set aside
future income to pay the banker – and hence a loss of future discretionary spending.
3. Towards a model of financialized economies
Creating a more realistic model of today's financialized economies to trace this phenomenon requires
a breakdown of the national income and product accounts (NIPA) to see the economy as a set of distinct
sectors interacting with each other. These accounts juxtapose the private and public sectors as far
as current spending, saving and taxation is concerned. But the implication is that government budget
deficits inflate the private-sector economy as a whole.
Neoliberalism counterattacked and scored a victory in Argentina. the trick is to use economic
difficulties caused by neoliberalism to bring to power a neoliberal candidate (or more liberal
candidate, if the current was already neoliberal buy stayed Washington consensus). That trick was
used previously in Ukraine.
Notable quotes:
"... Washington has maintained a policy of "rollback" and "containment" against almost all of the left governments that have won elections in the 21st century. So there is quite a bit of excitement here among the business and foreign policy elite ..."
"... Argentina and the region have changed too much over the past 15 years to return to the neoliberal, neocolonial past. The Washington foreign policy establishment may not understand this, but Macri's handlers did. That's why they took the trouble to package him as something very different from what he is. ..."
"... State Corruption is ever and always a pre text for reassertion of plutocratic hegemony ..."
The election of right-wing candidate Mauricio Macri as Argentina's president on Sunday, which
just a few months ago was unexpected, is a setback for Argentina and for the region.
... ... ...
Washington has maintained a policy of "rollback" and "containment" against almost all of
the left governments that have won elections in the 21st century. So there is quite a bit of
excitement here among the business and foreign policy elite, with Brazil's President Dilma Rousseff facing a recession
and political crisis, and Venezuela's Chavismo confronting an economic crisis and possible loss of
its first national election in 17 years. So naturally they are happy about this unprecedented right-wing
electoral victory in Argentina. Articles are already sprouting up, welcoming the long-awaited demise
of the Latin American left.
But reports of this demise, to paraphrase Mark Twain, are somewhat exaggerated. A more likely outcome
is like that of Chile, where a lackluster candidate was unable to take advantage of Socialist Party
President Michelle Bachelet's 80 percent approval rating, and lost to a right-wing billionaire in
2010. He lasted four years, and then the country went back to Bachelet.
Argentina and the region have changed too much over the past 15 years to return to the neoliberal,
neocolonial past. The Washington foreign policy establishment may not understand this, but Macri's
handlers did. That's why they took the trouble to package him as something very different from what
he is.
Argentine Election a Setback, But Not Likely to Reverse Latin America's 21st Century Trend
By Mark Weisbrot
The election of right-wing candidate Mauricio Macri as Argentina's president on Sunday, which
just a few months ago was unexpected, is a setback for Argentina and for the region. In the last
13 years, Argentina had made enormous economic and social progress. Under the Kirchners (first
Néstor and then Cristina Fernández de Kirchner), poverty fell by about 70 percent, and extreme
poverty by 80 percent. (This is for 2003 to mid-2013, the last year for which independent estimates
are available; they are also based on independent estimates of inflation.) Unemployment fell from
more than 17.2 percent to 6.9 percent , according to the IMF.
But Daniel Scioli, the candidate of the Peronist "Front for Victory", who represented the governing
coalition including President Fernández, did not do a good job defending these achievements. He
also didn't seem to make clear what he would do to fix the country's current economic problems.
In the past four years, growth has been slow (averaging about 1.1 percent annually), inflation
has been high (with private estimates in the 20s), and a black market for the dollar has developed.
This gave Macri (and his "Cambiemos" or "Let's Change" coalition) an opening to present himself
as the candidate of a better future.
With skilled marketing help from an Ecuadorean public relations firm, he also succeeded in
defining himself as something far more moderate than he is likely to be, thus winning over voters
who might otherwise be afraid of a return to the pre-Kirchner depression years.
Some of the things he has indicated he would do could have a positive impact, if done correctly.
He will likely cut a deal with vulture funds who have been holding more than 90 percent of Argentina's
creditors hostage since New York judge Thomas Griesa ruled in 2014 that the government is not
allowed to pay them. If the cost is not too high, it could be a net positive by re-opening a path
for Argentina to return to international borrowing - something that Scioli would likely have also
done.
A liberalization of the exchange rate that got rid of the black market could be a big step
forward. But much depends on how it is done: If it causes inflation to spike and the government
does nothing to protect poor and working people, they could lose a lot.
Macri may also take measures to bring down inflation, which is something that needs to be done.
But here especially there are great dangers, because he is likely to do so by shrinking the economy.
He wants to reduce the central government budget deficit, which will grow as a percent of GDP
with austerity. Given his ideology and politics, there is serious risk of a downward spiral of
austerity and recession, as the country suffered from 1998-2001. If there is inflation from the
devaluation, and they are eager to get rid of that too, this could make matters worse.
His campaign statements and positions indicate that he is against a government role in promoting
industry, so the country's development is likely to suffer as a result. He has proposed tax cuts
for upper- income groups, and so budget cuts are likely since he has pledged to reduce the government
budget deficit. If you add it all up, the majority of Argentines are likely to suffer from any
economic transition that he can engineer.
But he will not have a working majority in Congress, so it remains to be seen how much he can
do. Internationally, he has moved immediately to demonstrate his overwhelming loyalty to the United
States government, which had been previously demonstrated in confidential U.S. embassy cables
published by WikiLeaks. One of his very first statements after being elected was to denounce Venezuela
and threaten to have them suspended from Mercosur. Since this is not an issue that was pressing
to Argentine voters, it is clear that it is part of the U.S.-led international campaign leading
up to Venezuela's December 6 elections, which seeks to delegitimize the government and the elections.
Macri's willingness to join this campaign is something that no other South American president
would do. On the contrary, in the past decade South American presidents have repeatedly joined
together to defend democracy in the region when it was under attack, with Washington on the other
side - not only in Venezuela, in 2014, 2013, and 2002; but in but in Bolivia (2008); Honduras
(2009); Ecuador (2010); and Paraguay (2012). If Macri continues down this road, he will not only
bring shame to Argentina, but he will damage hemispheric relations.
Washington has maintained a policy of "rollback" and "containment" against almost all of the
left governments that have won elections in the 21st century. So there is quite a bit of excitement
here among the business and foreign policy elite, with Brazil's President Dilma Rousseff facing
a recession and political crisis, and Venezuela's Chavismo confronting an economic crisis and
possible loss of its first national election in 17 years. So naturally they are happy about this
unprecedented right-wing electoral victory in Argentina. Articles are already sprouting up, welcoming
the long-awaited demise of the Latin American left.
But reports of this demise, to paraphrase Mark Twain, are somewhat exaggerated. A more likely
outcome is like that of Chile, where a lackluster candidate was unable to take advantage of Socialist
Party President Michelle Bachelet's 80 percent approval rating, and lost to a right-wing billionaire
in 2010. He lasted four years, and then the country went back to Bachelet.
Argentina and the region have changed too much over the past 15 years to return to the neoliberal,
neocolonial past. The Washington foreign policy establishment may not understand this, but Macri's
handlers did. That's why they took the trouble to package him as something very different from
what he is.
Narwhal -> anne:
too much here to comment on.
Weisbrot couches his analysis in right vs left wing politics which played only a minor part.
The election was about the incompetence of the Kirchners. Argentinians have had enough and
finally kicked the incompetents out.
"with Brazil's President Dilma Rousseff facing a recession and political crisis" THAT HER INCOMPETENCE
AND TOTAL CORRUPTION CAUSED....the vast majority has had enough.
Has this guy actually visited Argentina and Brazil...
anne -> Narwhal:
Do set down a focused argument and references when possible.
When "incompetence" and "total corruption" assertions are made, and even capitalized, they
should be referenced. As for the "vast majority" in Argentina who had had enough, would that be
the 51.4% who voted for President Macri?
Narwhal -> anne:
Sorry, Anne, I am not going to post a university research paper with references and footnotes
(been there and done that).
Argentine politics are so convoluted that I do not pretend to understand them. Suffice to say
that the are far more nuanced than simple liberal vs conservative. Only that those of us here
in Brazil breathed huge sigh of relief when the election results were announced.
OTOH his indirect references to Brazil showed even less knowledge of the region. I have made a very small attempt to give readers a tiny view of the Brazilian politics and
corruption in my other comment.
anne -> Narwhal:
On the other hand [Mark Weisbrot's] indirect references to Brazil showed even less knowledge
of the region.
[ I set down the direct references to Brazil by Mark Weisbrot, Franklin Serrano and Ricardo
Summa. Possibly the work they have done on Brazil reflects little knowledge as supposedly the
work done by Weisbrot on Argentina does, but I find the work carefully done and persuasive. ]
PPaine -> anne:
He has none. He's reacting like the usual middle brow bourgeois. Whatever he or she really is
Nuance here is just enough muddle to confuse the outsider. So long as that outsider salivates with every reference to corruption and incompetence
PPaine -> Narwhal:
No don't hide the hand grenade here. This is class struggle. Nuances are nonsense. State Corruption is ever and always a pre text for reassertion of plutocratic hegemony
The point will be clear once this agent of the haute bourgeoise.
Starts rectifying more then a decade of improved welfare systematics
anne -> PPaine :
State Corruption is ever and always a pre text for reassertion of plutocratic hegemony
The point will be clear once this agent of the haute bourgeoise
Starts rectifying more then a decade of improved welfare systematics
[ Interesting and all too reasonable historically for Latin America. ]
-- the real has devalued from about 2.1/US$ to 3.6/US$ today.
--bribes and kickbacks from Petrobras amounting to uncounted HUNDREDS of billions of reais
had their origin when President Dilma was Chairwoman of the Board of Directors.
--Ex President Lula's closest aid is serving a jail term for corruption. The government's leader
in the Senate was arrested today... the list goes on.
--The government took no steps to prevent the ecological disaster of two dam collapses this
month. Many are dead and will never be found or even counted. Thousands are homeless. 60 million
tons of toxic mud have completely destroyed 400 km of the Rio Doce. The mud reached the sea Sunday
and is now killing the ocean habitat.
--Pres Dilma signed a decree declarion the disaster an act of god, thereby absolving the mining
companies and the government of all legal responsibility.
PPaine -> anne:
The economist -- Now there's a source we can rely on --
Brazil Needs New Economic Program to Jump-Start Growth and Employment
By Mark Weisbrot
Finance Minister Joaquim Levy says that unemployment is going to increase in Brazil and that
Brazilians should "face some realities." No country should have a finance minister with this attitude
towards one of its population's most important needs – employment. And even worse, someone who
is acting on these twisted beliefs in order to make them reality. His own job should be the first
to go.
The vast majority of Brazilians are still hugely better off than they were before the Workers
Party assumed the presidency in January of 2003. Poverty was reduced by 55 percent and extreme
poverty by 65 percent from 2003-2012 and real (inflation-adjusted) wages grew by 35 percent –
including a doubling of the real minimum wage. From 2004-2010, the economy grew twice as fast
as it had over the previous 23 years, and the gains from growth were much more equally distributed.
But these gains are being eroded, as the economy sinks into recession and unemployment rises.
Why has this happened? A new report * by Brazilian economists Franklin Serrano and Ricardo Summa
shows that it is not primarily due to external factors – for example, the slowdown of global economic
growth and trade. Rather it is mainly a result of government policies that have reduced aggregate
demand since the end of 2010: tighter budgets, cuts in public investment, higher interest rates,
and tighter credit.
Austerity is not working in Brazil -- any more than it has been working in Europe. These policies
are not only creating unnecessary unemployment and poverty in the present, they are also sacrificing
Brazil's future. Brazil needs public investment in transportation and other infrastructure, but
this is the spending that is first to be sacrificed.
The Central Bank has raised short-term interest rates from 7.5 percent in April 2013 to 14.25
percent today. As a result of having exorbitant interest rates for many years, the government
pays more than 6 percent of GDP – about 20 percent of federal spending – in net interest. This
is among the world's highest government interest burdens.
Lowering interest rates could free up money in the budget for public investment. It is clear
that the government needs to increase spending in order to jump-start the economy. This is what
it did, successfully, when the global financial crisis and recession hit in 2009.
Brazil does not yet have to worry about external financial constraints, as it currently has
$369 billion in reserves. Its net public debt is only about 34 percent of GDP (This is low by
any comparison; the problem is the exorbitant interest rates, averaging 11 percent on outstanding
government bonds). The economy has plenty of reason to grow, but it is clear that the private
sector is not going to lead this growth.
Dilma won re-election in 2014 by promising to stand up to the oligarchy, and continue the successful
policies that brought considerable economic and social progress to Brazil for the first time in
decades. Levy and his friends in Brazil's powerful financial sector may prefer higher unemployment
and lower wages, but that is not what Brazilians voted for. There is no reason for the government
to commit political suicide by continuing to implement the failed economic program of its opposition.
Aggregate Demand and the Slowdown of Brazilian Economic Growth from 2011-2014
By Franklin Serrano and Ricardo Summa
Executive Summary
This paper looks in detail at the sharp slowdown in the Brazilian economy for the years 2011-2014,
in which economic growth averaged only 2.1 percent annually, as compared with 4.4 percent in the
2004-2010 period. The latter level of growth was also more than double Brazil's average annual
growth rate over the prior 23 years (although it was much lower than the pre-1980 period). It
is important to understand why the higher rate of growth experienced from 2004 to 2010 was not
sustained over the past few years.
The authors argue that the slowdown is overwhelmingly the result of a sharp decline in domestic
demand, rather than a fall in exports and even less any change in external financial conditions.
The sharp fall in domestic demand, in turn, is shown to be a result of deliberate policy decisions
made by the government. This decision to slow the economy was not necessary, i.e., it was not
made in response to some external constraint such as a balance-of-payments problem.
Brazil's exports, and the change in their quantity between the two periods, was too small to
account for most of the large slowdown in GDP growth. From 2011-2014, exports amounted to 11.3
percent of GDP, as compared with 11.9 percent for 2004-2010.
The idea that a deterioration in external financial conditions could have driven the slowdown
is also contradicted by the data. For example, the total foreign debt-to-exports ratio dropped
from 4.7 in 1999 to 1.27 by the end of 2010, and was 1.54 in 2014. The ratio of total external
debt to foreign reserves was reduced from 6.5 in 2000 to 0.89 in 2010 (and was 0.93 in 2014).
Also, the percent of Brazilian foreign liabilities that are denominated in dollars fell from around
75 percent in 2003 to a minimum of 35 percent in 2010, and was about 40 percent in 2014.
All of this indicates that the economy had room to expand after 2010. But the government decided
to reduce aggregate demand through changes in monetary, fiscal, and macroprudential policies.
For example, the Central Bank began a cycle of interest rate increases after February 2010 that
lasted until August 2011, raising the basic nominal interest rate from 8.75 percent to 12.5 percent.
The nominal interest rate increases and the macroprudential measures – which reduced the growth
of credit -- helped to a certain extent to end the consumption boom (especially of durable goods).
Private consumption growth decelerated sharply until mid-2012, partially as a result of these
measures.
At the end of 2010, the government also decided to promote a strong fiscal adjustment in order
to increase the primary surplus and to meet the full target of 3.1 percent of GDP in 2011. Another
sign of this contractionary commitment of the new government was the decision, after years of
high increases, not to raise the real minimum wage at all in 2011, something that had not occurred
in Brazil since 1994. And despite the global economic slowdown in early 2011, the signs of which
were evident from the first quarter, fiscal adjustment was maintained throughout 2011 and the
full target for the primary surplus was achieved.
This rapid increase in the primary surplus was only possible thanks to a strong reduction in
the growth of public spending. In 2011, public investment, both of the central government and
the state-owned companies, fell dramatically, by 17.9 percent and 7.8 percent in real terms, respectively.
The government's contractionary policies led to a pronounced decline in private investment as
well, so that total investment (public and private) fell sharply. After growing at an average
annual rate of 8.0 percent between 2004 and 2010, peaking at 18 percent in 2010, gross fixed capital
formation over 2011-2014 grew by just 1.8 percent annually.
Thus it was the strong reduction in investment growth-not a process of "deindustrialization"
related to the real exchange rate, as some have maintained-that explains the slowdown in industrial
production since 2011. Manufacturing industry grew in the years 2007-2008 and in 2010, when the
exchange rate was already appreciated. It is also worth noting that during the 2004-2010 period
of higher growth, the appreciated real exchange rate was very important for controlling inflation
and thus also for increasing real wages and the growth rate of household consumption.
This paper also shows that the analysis put forth to justify the government's post-2010 strategy
was wrong. Even though the economy was already slowing in 2010, the argument was made that fiscal
tightening was necessary in order to have a large reduction in interest rates. The lower interest
rates, combined with tax cuts and other incentives for businesses, were expected to then allow
the private sector to lead growth by stimulating private investment and also export-led growth
as the real exchange rate depreciated due to the lower interest rates. However, as the pro-cyclical
policies shrank aggregate demand, private investment plummeted; and for reasons explained below,
export-led growth did not occur either. And the supposed link between public debt and sovereign
risk also turned out to be an unfounded assumption.
The result is that the government's efforts to encourage the private sector to lead economic
growth, through contractionary macro-economic policies, tax-cuts, and public-private partnerships,
had the opposite result. To return growth and employment creation to the levels of the 2004-2010
period, the government will have to change course and return to some of the policies and strategy
of those years, in which the government took responsibility for ensuring the growth of investment,
consumption, formal sector employment, and necessary infrastructure.
These authors are not buying this conventional wisdom:
"This paper also shows that the analysis put forth to justify the government's post-2010 strategy
was wrong. Even though the economy was already slowing in 2010, the argument was made that fiscal
tightening was necessary in order to have a large reduction in interest rates. The lower interest
rates, combined with tax cuts and other incentives for businesses, were expected to then allow
the private sector to lead growth by stimulating private investment and also export-led growth
as the real exchange rate depreciated due to the lower interest rates."
Neither am I but maybe for different reasons. While I'm not expert on Brazil, its macroeconomic
data paints a picture of nominal rates being high more because inflation is high not high real
interest rates. Its currency is devaluing in nominal terms for similar reasons. Why a nation with
a depressed economy has this high inflation is a mystery.
The conventional wisdom seems to be that Brazil should do a 1993 Clinton-Greenspan macroeconomic
mix with fiscal austerity. This is akin to what Volcker tried to get the clueless Reagan White
House to do in 1983. But it strikes me that Brazil's issues are different and that the fiscal
austerity did not have the effects from this conventional wisdom.
Narwhal -> pgl:
Inflation is as much result of devaluation as a cause of devaluation. The major driver is the
flow of funds; 1) The slow down and reversal of corporate investment from abroad; 2)Repatriation
of accumulated corporate profits to sustain home country weaknesses and avoid probable devaluation
before it occurred. 3)Outflow of 'hot money',speculative, portfolio investments. 4)The fall in
value of commodity exports (oil). 4) Increased cost of servicing and rolling over foreign debt.
Other factor include: downgrading of Brazilian sovereign debt, the HUGE cost of the Petrobras
and other scandals, total loss of confidence both internally and externally in the ability of
the government to understand or much less deal with the political/economic situation.
All this neoliberal talk about "maximizing shareholder value" and hidden redistribution mechanism
of wealth up. It;s all about executive pay. "Shareholder value" is nothing then a ruse for
getting outsize bonuses but top execs. Who cares if the company will be destroyed if you have a golden
parachute ?
Notable quotes:
"... IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested in capital expenditures and R D. It's staggering under its debt, while revenues have been declining for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. ..."
"... Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade, compared to $82 billion in R D and $18 billion in capital spending. 3M spent $48 billion on buybacks and dividends, and $30 billion on R D and capital expenditures. They're all doing it. ..."
"... Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income for the first time in a non-recession period. ..."
"... This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion, against their combined net income of $847 billion. ..."
"... Buybacks and dividends amount to 113% of capital spending among companies that have repurchased shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big driver in a recovery. Not this time! Hence the lousy recovery. ..."
"... Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs. A company buying its own shares creates additional demand for those shares. It's supposed to drive up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also reduce the number of outstanding shares, thus increase the earnings per share, even when net income is declining. ..."
"... But when companies load up on debt to fund buybacks while slashing investment in productive activities and innovation, it has consequences for revenues down the road. And now that magic trick to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered. ..."
"... Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've legalized insider trading or engineered (a) loophole(s). ..."
"... On a somewhat related perspective on subterfuge. The language of "affordability" has proven to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but camouflages the means of embezzling the means of distribution. Isn't distribution, really, the only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement? ..."
"... "Results of all this financial engineering? Revenues of the S P 500 companies are falling for the fourth quarter in a row – the worst such spell since the Financial Crisis." ..."
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist,
and author, with extensive international work experience. Originally published at
Wolf Street.
Magic trick turns into toxic mix.
Stocks have been on a tear to nowhere this year. Now investors are praying for a Santa rally to
pull them out of the mire. They're counting on desperate amounts of share buybacks that companies
fund by loading up on debt. But the magic trick that had performed miracles over the past few years
is backfiring.
And there's a reason.
IBM has blown $125 billion on buybacks since 2005, more than the $111 billion it invested
in capital expenditures and R&D. It's staggering under its debt, while revenues have been declining
for 14 quarters in a row. It cut its workforce by 55,000 people since 2012. And its stock is
down 38% since March 2013.
Big-pharma icon Pfizer plowed $139 billion into buybacks and dividends in the past decade,
compared to $82 billion in R&D and $18 billion in capital spending. 3M spent $48 billion on buybacks
and dividends, and $30 billion on R&D and capital expenditures. They're all doing it.
"Activist investors" – hedge funds – have been clamoring for it. An investigative report by Reuters,
titled
The Cannibalized Company, lined some of them up:
In March, General Motors Co acceded to a $5 billion share buyback to satisfy investor Harry
Wilson. He had threatened a proxy fight if the auto maker didn't distribute some of the $25 billion
cash hoard it had built up after emerging from bankruptcy just a few years earlier.
DuPont early this year announced a $4 billion buyback program – on top of a $5 billion program
announced a year earlier – to beat back activist investor Nelson Peltz's Trian Fund Management,
which was seeking four board seats to get its way.
In March, Qualcomm Inc., under pressure from hedge fund Jana Partners, agreed to boost its
program to purchase $10 billion of its shares over the next 12 months; the company already had
an existing $7.8 billion buyback program and a commitment to return three quarters of its free
cash flow to shareholders.
And in July, Qualcomm announced 5,000 layoffs. It's hard to innovate when you're trying to please
a hedge fund.
CEOs with a long-term outlook and a focus on innovation and investment, rather than financial
engineering, come under intense pressure.
"None of it is optional; if you ignore them, you go away," Russ Daniels, a tech executive with
15 years at Apple and 13 years at HP, told Reuters. "It's all just resource allocation," he said.
"The situation right now is there are a lot of investors who believe that they can make a better
decision about how to apply that resource than the management of the business can."
Nearly 60% of the 3,297 publicly traded non-financial US companies Reuters analyzed have engaged
in share buybacks since 2010. Last year, the money spent on buybacks and dividends exceeded net income
for the first time in a non-recession period.
This year, for the 613 companies that have reported earnings for fiscal 2015, share buybacks
hit a record $520 billion. They also paid $365 billion in dividends, for a total of $885 billion,
against their combined net income of $847 billion.
Buybacks and dividends amount to 113% of capital spending among companies that have repurchased
shares since 2010, up from 60% in 2000 and from 38% in 1990. Corporate investment is normally a big
driver in a recovery. Not this time! Hence the lousy recovery.
Financial engineering takes precedence over actual engineering in the minds of CEOs and CFOs.
A company buying its own shares creates additional demand for those shares. It's supposed to drive
up the share price. The hoopla surrounding buyback announcements drives up prices too. Buybacks also
reduce the number of outstanding shares, thus increase the earnings per share, even when net income
is declining.
"Serving customers, creating innovative new products, employing workers, taking care of the
environment … are NOT the objectives of firms," sais Itzhak Ben-David, a finance professor of
Ohio State University, a buyback proponent, according to Reuters. "These are components in the
process that have the goal of maximizing shareholders' value."
But when companies load up on debt to fund buybacks while slashing investment in productive
activities and innovation, it has consequences for revenues down the road. And now that magic trick
to increase shareholder value has become a toxic mix. Shares of buyback queens are getting hammered.
Citigroup credit analysts looked into the extent to which this is happening – and why. Christine
Hughes, Chief Investment Strategist at
OtterWood Capital, summarized the Citi report this way: "This dynamic of borrowing from
bondholders to pay shareholders may be coming to an end…."
Their chart (via OtterWood Capital) shows that about half of the cumulative outperformance of
these buyback queens from 2012 through 2014 has been frittered away this year, as their shares, IBM-like,
have swooned...
... ... ...
Selected Skeptical Comments
Mbuna, November 21, 2015 at 7:31 am
Me thinks Wolf is slightly barking up the wrong tree here. What needs to be looked at is how
buy backs affect executive pay. "Shareholder value" is more often than not a ruse?
ng, November 21, 2015 at 8:58 am
probably, in some or most cases, but the effect on the stock is the same.
Alejandro, November 21, 2015 at 9:19 am
Interesting that you mention ruse, relating to "buy-backs"…from my POV, it seems like they've
legalized insider trading or engineered (a) loophole(s).
On a somewhat related perspective on subterfuge. The language of "affordability" has proven
to be insidiously clever. Not only does it reinforce and perpetuate the myth of "deserts", but
camouflages the means of embezzling the means of distribution. Isn't distribution, really, the
only rational purpose of finance, i.e., as a means of distribution as opposed to a means of embezzlement?
Jim, November 21, 2015 at 10:42 am
More nuance and less dogma please. The dogmatic tone really hurts what could otherwise be a
fine but more-qualified position.
"Results of all this financial engineering? Revenues of the S&P 500 companies are falling
for the fourth quarter in a row – the worst such spell since the Financial Crisis."
Eh, no. No question that buybacks *can* be asset-stripping and often are, but unless you tie capital
allocation decisions closer to investment in the business such that they're mutually exclusive,
this is specious and a reach. No one invests if they can't see the return. It would be just as
easy to say that they're buying back stock because revenue is slipping and they have no other
investment opportunities.
Revenues are falling in large part because these largest companies derive an ABSOLUTELY HUGE portion
of their business overseas and the dollar has been ridiculously strong in the last 12-15 months.
Rates are poised to rise, and the easy Fed-inspired rate arbitrage vis a vis stocks and "risk
on" trade are closing. How about a little more context instead of just dogma?
John Malone made a career out of financial engineering, something like 30% annual returns for
the 25 years of his CEO tenure at TCI. Buybacks were a huge part of that.
Perhaps an analysis of the monopolistic positions of so many American businesses that allow them
the wherewithal to underinvest and still buy back huge amounts of stock? If we had a more competitive
economy, companies would have less ability to underinvest. Ultimately, I think buybacks are more
a result than a cause of dysfunction, but certainly not always bad.
"... Can courage trump careerism? I believe that for the forseeable future the answer is "No". People are highly incentivized to take the path of least resistance and simply go along to get along. ..."
"... It would be wrong to excuse the inaction of the Obama DOJ and SEC crews as being the result of some larger "corrosion of our collective values." The capos in those crews are the people doing the corroding, and not one of them was forced to (not) do what they did. Notice that every last one of the initial bunch is presently being paid, by Wall Street, to the tune of millions of dollars per year. They opted to cover up crimes and take a pay-off in exchange. And they are owed punishment. ..."
I'm embedding the text of a short but must-read speech by
Robert Jenkins, a former banker, hedge fund manager, and regulator (Bank of England) who is now
a Senior Fellow at Better Markets. If nothing else, be sure to look at the partial list of bank misconduct
and activities currently under investigation.
Jenkins points out that regulatory reform has fallen
short on multiple fronts, and perhaps the most important is courage. Readers may understandably object
to him giving lip service to the idea that Bernanke acted courageously during the crisis (serving
the needs of banks via unconventional means is not tantamount to courage), but he is a Serious Person,
and making a case against Bernanke would detract from his bigger message about the lack of guts post-crisis.
Now there have been exceptions, like Benjamin Lawsky, Sheila Bair, Gary Gensler, Kara Stein, and
in a more insider capacity, Danny Tarullo. Contrast their examples with the typical cronyism and
lame rationalizations for inaction, particularly by the Department of Justice and the SEC. It's not
obvious how to reverse the corrosion of our collective values. But it is important to remember than
norms can shift much faster than most people think possible, with, for instance, the 1950s followed
by the radicalism and shifts in social values of the 1960s, which conservative elements are still
fighting to roll back.
We do not live in an economy or a polity that breeds or rewards the kind of public-mindedness
and civic virtue that gives you courage. The author thinks the system needs courageous people,
but posits no conception of where they would come from and how they would thrive in the current
system (news flash: they won't). So this is a classic "I see the problem clearly but can't see
that the solution is impossible under the current system" piece.
TMock
Agreed.
For those who desire real solutions, try this…
The Universal Principles of Sustainable Development
In Tavis Smiley's book, My Journey with Maya Angelou, he recounts an ongoing discussion the
two of them entertained throughout the years concerning which trait, Love or Courage, was more
important in realizing a full life. Angelou argued that acting courageously was the most important.
Smiley saw love as the moving force. While important and moving, the discussion has the dead-end
quality of not being able to move past the current system of injustice. I say this because in
the end, both support incremental change to the existing system as the means to bring about social
justice. The powerful elite have perfected the manipulation of incremental change to render it
powerless.
When trying to change a social system, courage is needed. Courage to form a vision of the future
that is based on public-mindedness and civic virtues that bring justice into the world. Our current
leaders are delivering the exact opposite of civic justice. Its time to call them out on their
duplicity, and ignore their vision of the future.
The courage that is needed today is not the courage to stand up to the criminals running things
and somehow make them change. It is the courage to make them irrelevant. Change will come from
the bottom up, one person at a time.
cnchal
And when one shows up, look what happens.
The disturbing fact is that laws have been broken but law breaking has not touched
senior management.
If they knew, then they were complicit. If they did not, then they were incompetent. Alternatively,
if the deserving dozens have indeed been banned from the field let the list be known – that we
might see some of that "professional ostracism" of which Governor Carney speaks. One person
who did lose his position and quite publicly at that was Martin Wheatley, the UK's
courageous conduct enforcer.
Meanwhile the chairman of Europe's largest bank, Douglas Flint at HSBC, remains
in situ – despite having been on the board since 1995; despite having signed off on the
acquisition of Household Finance; and despite having had oversight of tax entangled subsidiaries
in Switzerland and money laundering units in Mexico. Oh, and you'll love this: the recently retired
CEO of Standard Chartered is reportedly an advisor to Her Majesty's Government. Standard Chartered
was among the first to be investigated for violations of rogue regime sanctions. The bank
was fined heavily and may be so again.
Courageous people get fired, which leads to no courageous people left.
GlassHammer
Can courage trump careerism? I believe that for the forseeable future the answer is "No". People are highly incentivized
to take the path of least resistance and simply go along to get along.
susan the other
By extreme necessity (created by total dysfunction) we will probably wind up with planned and
coordinated economies that do not rely on speculation & credit to come up with the next great
idea. Those ideas will be forced to come from the top down. And the problems of unregulated capitalism
frantically chumming for inspiration and extreme profits will shrink back down from a world-eating
monster to just a fox or two.
Oliver Budde
It would be wrong to excuse the inaction of the Obama DOJ and SEC crews as being the result
of some larger "corrosion of our collective values." The capos in those crews are the people doing
the corroding, and not one of them was forced to (not) do what they did. Notice that every last
one of the initial bunch is presently being paid, by Wall Street, to the tune of millions of dollars
per year. They opted to cover up crimes and take a pay-off in exchange. And they are owed punishment.
Malcolm MacLeod, MD
Oliver: I believe that you hit the nail on the head, and
I wholeheartedly agree.
"... The biggest market in the world today is derivatives, money making money without a useful product or service in sight. With the market in derivatives being ten times larger than global GDP we can see that making useful products and providing useful services is nearly irrelevant even today. ..."
"... "When Capitalism reaches its zenith, everyone will be an investor and no one will be doing anything." ..."
"... This problem of debt vs income seems to reflect the ongoing financialization (extraction, not to be confused with financing) of the global economy rather than a focus on capital development of people and the social and productive infrastructure. ..."
"... The "new model" was inefficient (too many fingers in the pie, all of them extracting value), highly risky (often Ponzi finance from the beginning with reverse amortization), and critically dependent on rising home prices. Even leaving aside the pervasive fraud, the model was diametrically opposed to the public interest, that is, the promotion of the capital development of the economy. It left behind whole neighborhoods of abandoned homes as well as new home developments that could not be sold. ..."
"... In my understanding, the Great Depression was an implosion of the credit system after a period of over investment in productive capacity. The investors failing to pay the workers enough to buy the extra goods produced. The projected returns never materialised to pay back the debt… Boom! ..."
"... China still has implicit state control of the banking sector, they may still have the political will to make any bad debt disappear with the puff of a fountain pen. That option is always available to a sovereign. ..."
"... They specialized in mass production the way agribusiness has here, where the production is not where the consumption is. It's as if all the pig farmers of North Carolina and corn growers in Iowa woke up one morning and found out that the people of the Eastern Seaboard had all been put on a starvation diet. The economic results in the grain belt would not be pretty. Ditto China. ..."
"... Except that China ain't Iowa, they can create a middle class as big as Europe and US combined. ..."
"... It's just anathema for the ruling class to give the little guys a break. ..."
"... The global glut of oil and other resources can't just be attributed to rising production in "tight oil". Somehow the Powers that be are hiding a great deal of economic contraction. If the world economy were growing it would need oil, copper, lead, zinc, wood and wood pulp, gold, and other metals as inputs. What I want to know is the extent of the cover-up, and what the global economy really looks like. ..."
"... We are not competent to forecast the future yet. Even the weather surprises us. Its also the case that people who do have relevant data are quite likely to convert that into profit rather than share it. ..."
"... It's the collapse of bonded warehouse copper/aluminum/etc. lending frauds and all that rehypothecation. I don't think it's just a problem in end demand. It's a problem in the derivatives/futures market. ..."
"... Here is a very good case study for why people are always wrong about economy and markets. What happen to all the currency manipulators like Paul Krugman? ..."
We shouldn't be too surprised at falling commodity prices.
Using raw materials to make real things is all very 20th Century, financial engineering is
the stuff of the 21st Century.
When Capitalism reaches its zenith, everyone will be an investor and no one will be doing anything.
Central Bank inflated asset bubbles will provide for all.
The biggest market in the world today is derivatives, money making money without a useful product
or service in sight. With the market in derivatives being ten times larger than global GDP we can see that making
useful products and providing useful services is nearly irrelevant even today.
"When Capitalism reaches its zenith, everyone will be an investor and no one will be doing
anything."
+1000
Ah, that glorious day when we're all rich, rich, RICHer than Midas from interest, dividends, and
rents!!!
Just to amuse myself, I intend to be a dog poop scooper – and pick up some pocket change of 1
million dollars a poop…
This problem of debt vs income seems to reflect the ongoing financialization (extraction,
not to be confused with financing) of the global economy rather than a focus on capital development
of people and the social and productive infrastructure.
I liked how Wray and Mazzucato linked the two in their Mack the Turtle analogy.
"Underlying all of this financialization was the homeowner's income-something like Dr. Seuss's
King Yertle the Turtle-with layer upon layer of financial instruments, all of which were supported
by Mack the turtle's mortgage payments. The system collapsed because Mack fell delinquent on payments
he could not possibly have met: the house was overpriced (and the mortgage could have been for
more than 100% of the price!), the mortgage terms were too unfavorable, the fees collected by
all the links in the home mortgage finance food chain were too large, Mack had to take a cut of
pay and hours as the economy slowed, and the late fees piled up (fraudulently, in many cases as
mortgage servicers "lost" payments).
The "new model" was inefficient (too many fingers in the
pie, all of them extracting value), highly risky (often Ponzi finance from the beginning with
reverse amortization), and critically dependent on rising home prices. Even leaving aside the
pervasive fraud, the model was diametrically opposed to the public interest, that is, the promotion
of the capital development of the economy. It left behind whole neighborhoods of abandoned homes
as well as new home developments that could not be sold."
Interesting, the supposition here is that China is heading for a depression similar to the
Great Depression.
In my understanding, the Great Depression was an implosion of the credit system after a period
of over investment in productive capacity. The investors failing to pay the workers enough to
buy the extra goods produced. The projected returns never materialised to pay back the debt… Boom!
China could well be headed down that road, there isn't enough money getting into the pockets
of ordinary Chinese that's for sure. Elites everywhere just can't bring themselves to give a break
for those at the bottom.
China still has implicit state control of the banking sector, they may still have the political
will to make any bad debt disappear with the puff of a fountain pen. That option is always available
to a sovereign.
Then again they may just realize in time, someone needs to be paid to buy all the junk.
They were counting on us and the Europeans, but we've let them down. The race to the bottom
erased the global middle class that could buy Chinese consumer products.
They specialized in mass
production the way agribusiness has here, where the production is not where the consumption is.
It's as if all the pig farmers of North Carolina and corn growers in Iowa woke up one morning
and found out that the people of the Eastern Seaboard had all been put on a starvation diet. The
economic results in the grain belt would not be pretty. Ditto China.
The global glut of oil and other resources can't just be attributed to rising production in
"tight oil". Somehow the Powers that be are hiding a great deal of economic contraction. If the
world economy were growing it would need oil, copper, lead, zinc, wood and wood pulp, gold, and
other metals as inputs. What I want to know is the extent of the cover-up, and what the global
economy really looks like.
Where were you in 2011? I was here reading NC. One of the Links posted was a graph of the abrupt
shutdown of China's economy – It was a cliffscape.
Very long vertical drop off. So dramatic I
could hardly believe it and I said I was having trouble catching my breath. Another commenter
said it looked like a tsunami. Of exported deflation as it turns out.
Things have been extreme
since 2007 when the banksters began to fall; 2008 when Lehman crashed (just after the Beijing
Olympics, how convenient for China…) and credit shut down. China was doin' just fine until then.
In spite of the irrational mess in global capitalist eonomix.
The only way to remedy it was to
shut it down I guess. That's really not very fine-tuned for a system the whole world relies on,
is it?
Proceeds from the laughable assumption that official China economic numbers 'may not be as
reliable as we'd like' rather than being 'persistently and hugely faked,' (especially during slowdowns)
and ignores that the housing-market slowdown and huge unsold-RE-overhang will also necessarily
be accompanied by a price crash, hence a huge amount of toxic debt being exposed – really basic
boom/bust dynamics.
And no demographic boom coming to the rescue, either. (But he does repeatedly
invoke the magic 'service economy boom' mantra mentioned by Ilargi.) Thankfully most of the commenters
rightly take the author to task.
Firstly, its only China's buying that stops oil falling even further Sr Ilargi.
Secondly its a Peoples' Republic – employment must be maintained.
We are not competent to forecast the future yet. Even the weather surprises us. Its also the
case that people who do have relevant data are quite likely to convert that into profit rather
than share it.
Received a small airmail parcel today containing some replacement attachments for my Dremel
moto-tool … package was addressed from Shenzen, specifically the "Fuming Manufacturing Park".
It's the collapse of bonded warehouse copper/aluminum/etc. lending frauds and all that rehypothecation.
I don't think it's just a problem in end demand. It's a problem in the derivatives/futures market.
Here is a very good case study for why people are always wrong about economy and markets. What happen to all the currency manipulators like Paul Krugman?
"... When it comes to the hubris of corporate chief financial officers, who have been more than happy leveraging up balance sheets in order to reward shareholders, the analysts didn't mince words. We find that corporate CFOs historically are inherently backward-looking when setting corporate financing decisions, relying on past extrapolations of economic activity, even when current market pricing suggests future investment returns may be lower, they wrote. ..."
"... That leaves downgrades by credit-rating agencies as one catalyst that could spark a turn in the cycle; downgrades of corporate credit have already exceeded upgrades this year at some of the bond graders. ..."
"... Might the rating agencies spoil the party? they asked. In the end we believe strong economic interests will overwhelm rationale considerations. Rating agencies remain heavily dependent on new issuance activity, face significant competitive pressures (as issuers will select two of three ratings) and appear unconcerned with where we are in the credit cycle (e.g., see Moody's latest conference call). ..."
"... With UBS having taken all those potential catalysts firmly off the table, that leaves just fundamentals to worry about. Who, for the past few years, has been worrying about those? [Sarcasm? - Editor] ..."
It's no secret that companies have been taking advantage of years of low interest rates to
sell cheap debt to eager investors, locking in lower funding costs that have allowed them to go
on a spree of share buybacks and mergers and acquisitions.
With fresh evidence that investors are becoming more discerning when it comes to corporate credit
as they approach the first interest rate rise in the U.S. in almost a decade, it's worth asking
whether anything might stop the trend of companies assuming more and more debt on their balance
sheets.
... ... ...
For a start, they note that higher funding costs are unlikely to dissuade companies from
continuing to tap the debt market since, even after a rate hike, financing costs will remain near
historic lows. "The predominant reason is the Fed[eral Reserve] is anchoring low interest rates,"
the analysts wrote.
When it comes to the hubris of corporate chief financial officers, who have been more than
happy leveraging up balance sheets in order to reward shareholders, the analysts didn't mince
words. "We find that corporate CFOs historically are inherently backward-looking when setting
corporate financing decisions, relying on past extrapolations of economic activity, even when
current market pricing suggests future investment returns may be lower," they wrote.
"Several management teams have been on the road indicating higher funding costs of up to 100 to
200 basis points would not impede attractive M&A deals, in their view."
Higher market volatility has often been cited as one factor that could knock the corporate
credit market off its seat...
That leaves downgrades by credit-rating agencies as one catalyst that could spark a turn
in the cycle; downgrades of corporate credit have already exceeded upgrades this year at some of
the bond graders. Here, Mish and Caprio offered some stunningly blunt words. "Might the
rating agencies spoil the party?" they asked. "In the end we believe strong economic interests
will overwhelm rationale considerations. Rating agencies remain heavily dependent on new issuance
activity, face significant competitive pressures (as issuers will select two of three ratings)
and appear unconcerned with where we are in the credit cycle (e.g., see Moody's latest conference
call)."
With UBS having taken all those potential catalysts firmly off the table, that leaves just
fundamentals to worry about. Who, for the past few years, has been worrying about those?
[Sarcasm? - Editor]
"Bottom line, we struggle to envision an end to the releveraging phenomenon-absent a
substantial correction in corporate earnings and/or broader risk assets," concluded the UBS
analysts.
Hillary tried to play the gender card and the 9/11 card in an attempt to escape to accusation
(actually a provable fact) that she is a Wall Street sheel. "Why has Wall Street been the major
campaign contributor to Hillary Clinton?" Sanders asked loudly, concluding that big contributors only
give because "They expect to get something. Everybody knows it."
...Clinton asserted that under her
bank-regulation plan, if Wall Street institutions don't play by the rules "I will break them up."
Sanders minced her defense into peaces: "Wall Street play by the rules? Who are we kidding?!
The business model for Wall Street is fraud," Sanders fired back.
A short time later, the moderators got a tweet calling her out for "invoking 9/11" to justify taking
donations from Wall Street. One tweeter said they'd never seen a candidate "invoke 9/11 to champion
Wall Street. What does that have to do with taking big donations," Clinton was asked.
Sanders said that there's no getting around the fact that Wall Street has become a dominant political
power and its "business model is greed and fraud, and for the sake of our economy major banks must be
broken up."
Bernie compared himself to Ike, scoring one of the few real laugh lines of the night. CBS News moderator
Nancy Cordes asked Sanders how he's going to pay for expensive programs such as his tuition-free college
plan. By taxing the wealthy and big corporations, he says. Asked how much of a tax hike he's planning
to stick them with, he responded, "We haven't come up with an exact number yet … But it will not be
as high as the number under Dwight D. Eisenhower which was 90%," Sanders said of the Republican president.
"I'm not that much of a socialist compared to Eisenhower," Sanders concluded, to guffaws from the
crowd.
Senator Sanders, let me just follow this line of thinking. You've criticized then Senator Clinton's
vote. Do you have anything to criticize in the way she performed as secretary of state?
BERNIE SANDERS:
I think we have a disagreement. And-- the disagreement is that not only did I vote against the
war in Iraq, if you look at history, John, you will find that regime change-- whether it was in the
early '50s in Iran, whether it was toppling Salvador Allende in Chile or whether it was overthrowing
the government Guatemala way back when-- these invasions, these-- these toppling of governments,
regime changes have unintended consequences. I would say that on this issue I'm a little bit more
conservative than the secretary.
JOHN DICKERSON:
Here, let me go--
MARTIN O'MALLEY:
John, may I-- may I interject here? Secretary Clinton also said that we left the h-- it was not
just the invasion of Iraq which Secretary Clinton voted for and has since said was a big mistake,
and indeed it was. But it was also the cascading effects that followed that.
It was also the disbanding of-- many elements of the Iraqi army that are now showing up as part
of ISIS. It was-- country after country without making the investment in human intelligence to understand
who the new leaders were and the new forces were that are coming up. We need to be much more far
f-- thinking in this new 21st century era of-- of nation state failures and conflict. It's not just
about getting rid of a single dictator. It is about understanding the secondary and third consequences
that fall next.
JOHN DICKERSON:
Governor O'Malley, I wanna ask you a question and you can add whatever you'd like to. But let
me ask you, is the world too dangerous a place for a governor who has no foreign policy experience?
MARTIN O'MALLEY:
John, the world is a very dangerous place. But the world is not too dangerous of a place for the
United States of America provided we act according to our principles, provided we act intelligently.
I mean, let's talk about this arc of-- of instability that Secretary Clinton talked about.
Libya is now a mess. Syria is a mess. Iraq is a mess. Afghanistan is a mess. As Americans we have
shown ourselves-- to have the greatest military on the face of the planet. But we are not so very
good at anticipating threats and appreciating just how difficult it is to build up stable democracies
and make the investments in sustainable development that we must as the nation if we are to attack
the root causes of-- of the source of-- of instability.
And I wanted to add one other thing, John, and I think it's important for all of us on this stage.
I was in Burlington, Iowa and a mom of a service member of ours who served two duties in Iraq said,
"Governor O'Malley, please, when you're with your other candidates and colleagues on-- on stage,
please don't use the term boots on Iraq-- on the ground. Please don't use the term boots on the ground.
My son is not a pair of boots on the ground."
These are American soldiers and we fail them when we fail to take into account what happens the
day after a dictator falls. And when we fall to act with a whole of government approach with sustainable
development, diplomacy and our economic power in-- alignment with our principles.
BERNIE SANDERS:
But when you talk about the long-term consequences of war let's talk about the men and women who
came home from war. The 500,000 who came home with P.T.S.D. and traumatic brain injury. And I would
hope that in the midst of all of this discussion this country makes certain that we do not turn our
backs on the men and women who put their lives on the line to defend us. And that we stand with them
as they have stood with us.
JOHN DICKERSON:
Senator Sanders, you've-- you've said that the donations to Secretary Clinton are compromising.
So what did you think of her answer?
BERNIE SANDERS:
Not good enough. (LAUGH) Here's the story. I mean, you know, let's not be naive about it. Why
do-- why over her political career has Wall Street a major-- the major-- campaign contributor to
Hillary Clinton? You know, maybe they're dumb and they don't know what they're gonna get. But I don't
think so.
Here is the major issue when we talk about Wall Street, it ain't complicated. You got six financial
institutions today that have assets of 56 per-- equivalent to 50-- six percent of the GDP in America.
They issue two thirds of the credit cards and one third of the mortgages. If Teddy Roosevelt, the
good republican, were alive today you know what he'd say? "Break them up. Reestablish (APPLAUSE)
(UNINTEL) like Teddy Roosevelt (UNINTEL) that is leadership. So I am the only candidate up here that
doesn't have a super PAC. I'm not asking Wall Street or the billionaires for money. I will break
up these banks, support community banks and credit unions-- credit unions. That's the future of banking
in America.
JOHN DICKERSON:
Quick follow-up because you-- you-- (APPLAUSE) Secretary Clinton, you'll get a chance to respond.
You said they know what they're going to get. What are they gonna get?
BERNIE SANDERS:
I have never heard a candidate, never, who's received huge amounts of money from oil, from coal,
from Wall Street, from the military industrial complex, not one candidate, go, "OH, these-- these
campaign contributions will not influence me. I'm gonna be independent." Now, why do they make millions
of dollars of campaign contributions? They expect to get something. Everybody knows that. Once again,
I am running a campaign differently than any other candidate. We are relying on small campaign donors,
$750,000 and $30 apiece. That's who I'm indebted to.
BERNIE SANDERS:
Here's-- she touches on two broad issues. It's not just Wall Street. It's campaigns, a corrupt
campaign finance system. And it is easy to talk the talk about ending-- Citizens United. But what
I think we need to do is show by example that we are prepared to not rely on large corporations and
Wall Street for campaign contributions.
And that's what I'm doing. In terms of Wall Street I respectfully disagree with you, Madame Secretary
in the sense that the issue is when you have such incredible power and such incredible wealth, when
you have Wall Street spending five billion dollars over a ten year period to get re-- to get deregulated
the only answer that I know is break them up, reestablish Glass Steagall.
JOHN DICKERSON:
Senator, we have to get Senator O'Malley in. But no-- along with your answer how many Wall Street--
veterans would you have in your administration?
MARTIN O'MALLEY:
Well, I'll tell you what, I've said this before, I-- I don't-- I believe that we actually need
some new economic thinking in the White House. And I would not have Robert Rubin or Larry Summers
with all due respect, Secretary Clinton, to you and to them, back on my council of economic advisors.
HILLARY CLINTON:
Anyone (UNINTEL PHRASE).
MARTIN O'MALLEY:
If they were architects, sure, we'll-- we'll have-- we'll have an inclusive group. But I won't
be taking my orders from Wall Street. And-- look, let me say this-- I put out a proposal-- I was
on the front line when people lost their homes, when people lost their jobs.
I was on the front lines as the governor-- fighting against-- fighting that battle. Our economy
was wrecked by the big banks of Wall Street. And Secretary Clinton-- when you put out your proposal
(LAUGH) on Wall Street it was greeted by many as quote/ unquote weak tea. It is weak tea. It is not
what the people expect of our country. We expect that our president will protect the main street
economy from excesses on Wall Street. And that's why Bernie's right. We need to reinstate a modern
version of Glass Steagall and we should have done it already. (APPLAUSE)
KATHIE OBRADOVICH:
And I will also go after executives who are responsible for the decisions that have such bad consequences
for our country. (APPLAUSE)
BERNIE SANDERS:
Look, I don't know-- with all due respect to the secretary, Wall Street played by the rules. Who
are we kidding? The business model of Wall Street is fraud. That's what it is. And we-- we have--
(APPLAUSE) and let me make this promise, one of the problems we have had I think all-- all Americans
understand it is whether it's republican administration or democratic administration we have seen
Wall Street and Goldman Sachs dominate administrations. Here's my promise Wall Street representatives
will not be in my cabinet. (APPLAUSE)
BERNIE SANDERS:
But let's-- let me hear it-- if there's any difference between the secretary and myself. I have
voted time and again to-- for-- for the background checks. And I wanna see it improved and expanded.
I wanna see them do away with the gun show loophole. In 1988 I lost an election because I said we
should not have assault weapons on the streets of America.
We have to do away with the strong man proposal. We need radical changes in mental health in America.
So somebody who's suicidal or homicidal can get the emergency care they need. But we have-- I don't
know that there's any disagreement here.
MARTIN O'MALLEY:
John, this is another one of those examples. Look, we have-- we have a lot of work to do. And
we're the only nation on the planet that buries as many of our people from gun violence as we do
in my own state after they-- the children in that Connecticut classroom were gunned down, we passed
comprehensive-- gun safety legislation, background checks, ban on assault weapons.
And senator, I think we do need to repeal that immunity that you granted to the gun industry.
But Secretary Clinton, you've been on three sides of this. When you ran in 2000 you said that we
needed federal robust regulations. Then in 2008 you were portraying yourself as Annie Oakley and
saying that we don't need those regulation on the federal level. And now you're coming back around
here. So John, there's a big difference between leading by polls and leading with principle. We got
it done in my state by leading with principle. And that's what we need to do as a party, comprehensive
gun--
MARTIN O'MALLEY:
John, there is not-- a serious economist who would disagree that the six big banks of Wall Street
have taken on so much power and that all of us are still on the hook to bail them out on their bad
debts. That's not capitalism, Secretary Clinton-- Clinton, that's crummy capitalism.
That's a wonderful business model if you place that bet-- the taxpayers bail you out. But if you
place good ones you pocket it. Look, I don't believe that the model-- there's lots of good people
that work in finance, Secretary Sanders. But Secretary Clinton, we need to step up. And we need to
protect main street from Wall Street. And you can't do that by-- by campaigning as the candidate
of Wall Street. I am not the candidate of Wall Street. And I encourage--
BERNIE SANDERS:
No, it's not throwing-- it is an extraordinary investment for this country. In Germany, many other
countries do it already. In fact, if you remember, 50, 60 years ago, University of California, City
University of New York were virtually tuition-free. Here it's a new (?) story.
It's not just that college graduates should be $50,000 or $100,000 in debt. More importantly,
I want kids in Burlington, Vermont, or Baltimore, Maryland, who are in the six grade or the eighth
grade who don't have a lot of money, whose parents that-- like my parents, may never have gone to
college. You know what I want, Kevin? I want those kids to know that if they study hard, they do
their homework, regardless of the income of their families, they will in fact be able to great a
college education. Because we're gonna make public colleges and universities tuition-free. This is
revolutionary for education in America. It will give hope for millions of young people.
BERNIE SANDERS:
It's not gonna happen tomorrow. And it's probably not gonna happen until you have real campaign finance
reform and get rid of all these super PACs and the power of the insurance companies and the drug
companies. But at the end of the day, Nancy, here is a question. In this great country of ours, with
so much intelligence, with so much capabilities, why do we remain the only (UNINTEL) country on earth
that does not guarantee healthcare to all people as a right?
Why do we continue to get ripped off by the drug companies who can charge us any prices they want?
Why is it that we are spending per capita far, far more than Canada, which is a hundred miles away
from my door, that guarantees healthcare to all people? It will not happen tomorrow. But when millions
of people stand up and are prepared to take on the insurance companies and the drug companies, it
will happen and I will lead that effort. Medicare for all, single-payer system is the way we should
go. (APPLAUSE)
BERNIE SANDERS:
Well-- I had the honor of being chairman of the U.S. Senate Committee on Veteran Affairs for two
years. And in that capacity, I met with just an extraordinary group of people from World War II,
from Korea, Vietnam, all of the wars. People who came back from Iraq and Afghanistan without legs,
without arms. And I've been determined to do everything that I could to make VA healthcare the best
in the world, to expand benefits to the men and women who put their lives on the line to defend (UNINTEL).
And we brought together legislation, supported by the American Legion, the VFW, the DAV, Vietnam
Vets, all of the veterans' organizations, which was comprehensive, clearly the best (UNINTEL) for
veterans' legislation brought forth in decades. I could only get two Republican votes on that. And
after 56 votes, we didn't get 60. So what I have to do then is go back and start working on a bill
that wasn't the bill that I wanted.
To (UNINTEL) people like John McCain, to (UNINTEL) people like Jeff Miller, the Republican chairman
of the House, and work on a bill. It wasn't the bill that I wanted. But yet, it turns out to be one
of the most significant pieces of veterans' legislation passed in recent history. You know, the crisis
was, I lost what I wanted. But I have to stand up and come back and get the best that we could.
JOHN DICKERSON:
All right, Senator Sanders. We end-- (APPLAUSE) we've ended the evening on crisis, which underscores
and reminds us again of what happened last night. Now let's move to closing statements, Governor
O'Malley?
MARTIN O'MALLEY:
John, thank you. And to all of the people of Iowa, for the role that you've performed in this
presidential selection process, if you believe that our country's problems and the threats that we
face in this world can only be met with new thinking, new and fresh approaches, then I ask you to
join my campaign. Go onto MartinOMalley.com. No hour is too short, no dollar too small.
If you-- we will not solve our nation's problems by resorting to the divisive ideologies of our
past or by returning to polarizing figures from our past. We are at the threshold of a new era of
American progress. That it's going to require that we act as Americans, based on our principles.
Here at home, making an economy that works for all of us.
And also, acting according to our principles and constructing a new foreign policy of engagement
and collaboration and doing a much better job of identifying threats before they back us into military
corners. There is new-- no challenge too great for the United States to confront, provided we have
the ability and the courage to put forward new leadership that can move us to those better and safer
and more prosperous (UNINTEL). I need your help. Thank you very, very much. (APPLAUSE)
BERNIE SANDERS:
This country today has more income and wealth inequality than any major country on earth. We have
a corrupt campaign finance system, dominated by super PACs. We're the only major country on earth
that doesn't guarantee healthcare to all people. We have the highest rate of childhood poverty. And
we're the only in the world, (UNINTEL) the only country that doesn't guarantee paid family and medical
leave. That's not the America that I think we should be.
But in order to bring about the changes that we need, we need a political revolution. Millions
of people are gonna have to stand up, turn off the TVs, get involved in the political process, and
tell the big monied interests that we are taking back our country. Please go to BernieSanders.com,
please become part of the political revolution. Thank you. (CHEERING) (APPLAUSE)
"... I agree. Excellent point on the frack log, but at some point with the reduced rate of drilling the frack log will dwindle. Let's take the Bakken where we have the best numbers, Enno estimates around 800 DUC wells (rough guess from memory), to make things simple let's assume no more wells are drilled because prices are so low. If 80 wells per month are completed the DUCs are gone in July 2016. Now the no wells drilled is probably not realistic. If 40 wells per month are drilled (though at these oil prices I still don't understand why) the 800 DUCs would last for 20 months rather than only 10 months, so your story makes sense at least for the Bakken. ..."
"... One thing to be careful with the fracklog, is that not all of these will be good wells. ..."
"... I agree that high cost will be likely to reduce demand. The optimistic forecasts assume there will be low cost supply judging by the price scenarios. For AEO 2013 Brent remains under $110/b (2013$) until 2031 and only reaches $141/b (2013$) in 2040. ..."
"... "Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion in bonds and loans are due for repayment over the next five years. ..."
"... U.S. drillers account for 20 percent of the debt due in 2015, ..."
"Mr Falih, who is also health minister, forecast the market would come into balance in the new
year, and then demand would start to suck up inventories and storage on oil tankers. "Hopefully,
however, there will be enough investment to meet the needs beyond 2017."
Other officials also estimated that it would probably take one to two years for the market to
clear up the oil market glut, allowing prices to recover towards $70-$80 a barrel."
"Non-OPEC supply is expected to fall in 2016, only one year after
the deep cuts in investment," he said.
"Beyond 2016, the fall in non-OPEC supply is likely to accelerate, as the cancellation
and postponement of projects will start feeding into future supplies, and the impact of previous
record investments on oil output starts to fade away."
I thought just about everyone was expecting a rebound in production by 2017?
The EIA. IEA. OPEC and most others expect non-OPEC production, excluding the U.S.
and Canada to decline in 2016 and the next few years due to the decline in investments and postponement
/ canceling of new projects.
Production in Canada is still projected to continue to grow, but at a much slower rate than previously
expected.
Finally, U.S. C+C production is expected to rebound in the second half of 2016 due to slightly
higher oil prices ($55-57/bbl WTI). Also, U.S. NGL production proved much more resilient, than
C+C, despite very low NGL prices.
Non-OPEC ex U.S. and Canada total liquids supply (mb/d) Source: EIA STEO October 2015
Thanks. I don't think oil prices at $56/b is enough to increase the drilling in the LTO
plays to the extent that output will increase, it may stop the decline and result in a plateau, it's
hard to know.
On the "liquids" forecast, the NGL is not adjusted for energy content as it should be, each barrel
of NGL has only 70% of the energy content of an average C+C barrel and the every 10 barrels of NGL
should be counted as 7 barrels so that the liquids are reported in barrels of oil equivalent (or
better yet report the output in gigajoules (1E9) or exajoules(1E18)). The same conversion should
be done for ethanol as well.
Note that not only the EIA, but also the IEA, OPEC, energy consultancies and investment
banks are projecting a recovery in US oil production in the later part of next year.
That said, I agree with you that $56 WTI projected by the EIA may not be sufficient to trigger
a fast rebound in drilling activity.
However there is also a backlog of drilled but uncompleted wells that could be completed and put
into operation with slightly higher oil prices.
Most shale companies have announced further cuts in investment budgets in 2016, so I think it is
difficult to expect significant growth in the U.S. onshore oil production in 2H16.
If and when oil prices reach $65-70/bbl, I think LTO may start to recover (probably in 2017 ?).
I think that annual growth rates will never reach 1mb/d+ seen in 2012-14, but 0.5 mb/d annual average
growth is quite possible for several years with oil prices exceeding $70.
I agree. Excellent point on the frack log, but at some point with the reduced rate of
drilling the frack log will dwindle. Let's take the Bakken where we have the best numbers, Enno estimates
around 800 DUC wells (rough guess from memory), to make things simple let's assume no more wells
are drilled because prices are so low. If 80 wells per month are completed the DUCs are gone in July
2016. Now the no wells drilled is probably not realistic. If 40 wells per month are drilled (though
at these oil prices I still don't understand why) the 800 DUCs would last for 20 months rather than
only 10 months, so your story makes sense at least for the Bakken.
I have no idea what the frack log looks like for the Eagle Ford. If its similar to the Bakken
and they complete 130 new wells per month, with about 61 oil rigs currently turning in the EF they
can drill 80 wells per month, so they would need 50 wells each month from the frack log. If there
are 800 DUCs, then that would last for 16 months.
The economics are better in the Eagle Ford because the wells are cheaper and transport costs are
lower, but the EUR of the wells is also lower (230 kb vs 336 kb), the well profile has a thinner
tail than the Bakken wells. I am not too confident about the EIA's DPR predictions for the Eagle
Ford, output will decrease, but perhaps they(EIA) assume the frack log is zero and that only 75 new
wells will be added to the Eagle Ford each month. If my guess of 150 new wells per month on average
from Sept to Dec 2015 is correct, then decline from August to Dec 204 will only be about 100 kb/d
and 255 kb/d from March to Dec 2015 (155 kb/d from March to August 2015).
One thing to be careful with the fracklog, is that not all of these will be good wells.
It is fair enough that companies like EOG will have some good DUCs, (should there be a "k" in that?)
in their fracklogs. But as the fracklog is worked through, I am sure there will be a some very ugly
DUCklings, that nobody wants to admit to. How many fall into this category, will be anybodies guess, but not all DUC, will turn out to be beautiful
swans?
On the predictions of the EIA and IEA, they also expect total oil supply to be quite
high in 2040. For example the EIA in their International Energy Outlook reference case they have C+C output
at 99 Mb/d in 2040.
Their short term forecasts are probably better than that, but my expectation for 2040 C+C output
is 62 Mb/d (which many believe is seriously optimistic, though you have never expressed an opinion
as far as I remember).
So I take many of these forecasts with a grain of salt, they are often more optimistic than me,
others are far more pessimistic, the middle ground is sometimes more realistic.
You said above that estimated URR of all global C+C (ex oil sands in Canada and Venezuela)
is 2500 Gb. And about 1250 Gb of C+C had been produced at the end of 2014. So the remaining resources
are 1250 Gb.
BP estimates total global proved oil reserves as of 2014 at 1700 Gb, or 1313 excluding Canadian
oil sands and Venezuela's extra heavy oil. Their estimate in 2000 was 1301 Gb and 1126 Gb. Hence,
despite cumulative production of 419 Gb in 2001-2014, proved reserves increased by 187 Gb, or 400
Gb including oil sands and Venezuela's Orinoco oil. Note that BP's estimate is for proved (not P+P)
reserves, but it includes C+C+NGLs. My very rough guess is that NGLs account for between 5% and 10%
of the total.
You may be skeptical about BP's estimates, but the fact is that proved reserves or 2P resources
are not a constant number; they are increasing due to new discoveries and technological advances.
BTW, the EIA's estimate of global C+C production increasing from 79 mb/d in 2014 to 99 mb/d in
2040 implies a cumulative output of 836 Gb, about 2/3 of your estimate of remaining 2P resources
of C+C or BP's estimate of the current proved reserves. Given future discoveries and improvements
in technology, I think that further growth of global oil production to about 100 mb/d by 2040 should
not be constrained by resource scarcity.
What can really make the EIA's and IEA's estimates too optimistic is not the depleting resource
base, but the high cost of future supply, political factors and/or lower than expected demand.
You are quite optimistic. Note that I add 300 Gb to the 2500 Gb Hubbert Linearization estimate to account for reserve growth
and discoveries.
The oil reserves reported in the BP Statistical review are 1312 Gb. Jean Laherrere estimates that
about 300 Gb of OPEC reserves are "political" to keep quotas at appropriate levels with respect to
"true" reserve levels. So the actual 2P reserves are likely to be 1010 Gb. Some of the cumulative
C+C output is extra heavy oil so the cumulative C+C-XH output is 1240 Gb so we have a total cumulative
discovery (cumulative output plus 2P reserves) of 2250 Gb through 2014.
My medium scenario with a URR of 2800 Gb of C+C-XH plus 600 Gb of XH oil (3400 Gb total C+C) assumes
550 Gb of discoveries plus reserve growth.
What do you expect for a URR for C+C?
Keep in mind that at some point oil prices rise to a level that substitutes for much of present
oil use will become competitive, so oil prices above $175/b (in 2015$) are unlikely to be sustained
in my view.
In a wider format below I will present a scenario with what extraction rates would be needed for
my medium scenario to reach 99 Mb/d in 2040.
I agree that high cost will be likely to reduce demand. The optimistic forecasts assume
there will be low cost supply judging by the price scenarios. For AEO 2013 Brent remains under $110/b
(2013$) until 2031 and only reaches $141/b (2013$) in 2040.
Depleting resources will raise production cost to more than these prices and demand will be reduced
due to high oil prices. There will be an interaction between depletion and the economics of supply and demand. It will
be depletion that raises costs, which will raise prices and reduce demand.
"Debt repayments will increase for the rest of the decade, with $72 billion maturing this year,
about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. About $550 billion
in bonds and loans are due for repayment over the next five years.
U.S. drillers account for 20 percent of the debt due in 2015, Chinese companies rank second with
12 percent and U.K. producers represent 9 percent."
[These are just the bonds that have yields higher than 10%]
[Its very unlikely that prices will recover in time to save many of the drillers, and even if
prices recover, even $75 oil will not help since they need $90 to break even to service the debt.
Also not sure who is going to buy maturing debt so it can be rolled over. Even if prices slowly recover,
there is likely to be fewer people willing to loan money drillers.]
It's not just the oil. The oil is convenient to point at because the US can pretend that
they got SA to cause the drop in order to stick it to Russia. Makes the US look really smug.
Meanwhile the truth is, copper down, zinc down, iron ore down, you name it down.
Baltic Dry almost crashing, soft commodities gone to hell. I guess SA can also influence
these markets as well.
"... Looking at the recent moves in exchange rates based on a simple switch in expectation of whether or not the Fed would raise rates in December or wait one or two meetings its seems obvious that the markets are not very good at anticipation. So I would not put much money on the ability of the markets to anticipate the trajectory and endpoint of raising rates - or the ability of anybody to guess where the exchange rates will go next. ..."
"... The drop in hours worked data in the productivity report is very confusing. ..."
"... I think lower oil prices has lead to a stronger consumption boost than initially thought. ..."
Have U.S. financial market stress indicators worsened substantially?
Has the U.S. labor market returned to normal?
What will the headline inflation rate be once the effects of the oil price shock dissipate?
Will the U.S. dollar continue to gain value against rival currencies?
I would add:
Will wage gains translate into inflation (or something along those lines)?
Anything else?
sanjait said in reply to Anonymous...
Markets move based on expectations of both economic fundamentals and the Fed's reaction
function. So both can create surprises.
In this case, a relatively stronger than expected US economy could push the dollar up quite a
bit. The central bank would be expected to dampen but not eliminate this effect, even without
changing their perceived reaction function.
DeDude said in reply to Anonymous... , November 10, 2015 at 02:35 PM
Looking at the recent moves in exchange rates based on a simple switch in expectation
of whether or not the Fed would raise rates in December or wait one or two meetings its seems
obvious that the markets are not very good at anticipation. So I would not put much money on
the ability of the markets to anticipate the trajectory and endpoint of raising rates - or the
ability of anybody to guess where the exchange rates will go next.
What we can say is that the strengthening of the US$ that has happened recently will hurt the
economy - whether it will hurt enough to slow the Fed is anybodies guess. Whether those
guesses have already been baked into the exchange rates is impossible to predict.
Bert Schlitz said...
On Angry Bear, there is a post about 3rd quarter hours and Spencer's remark:
"The drop in hours worked data in the productivity report is very confusing.
The employment shows several measures of hours worked and they increased in the third
quarter from 0.5% to 1,08 for aggregate weekly payrolls.
Something is really change.
The productivity report also had unit labor cost rising more than prices,
This implies falling profits, what the S&P 500 shows."
Basically wages accelerated rapidly in the 3rd quarter. The BLS didn't start catching up to it
until October. My guess the hours drop and employment picks up trying to hold down costs.
However, this will probably only level off things off for a few quarters, which would be good
enough to profits catch back up until the labor market becomes so tight, they simply have no
choice but to raise prices and hours worked surge again. Classic mid-cycle behavior (which
Lambert should have noticed).
This is what triggered the 3rd quarter selloff and inventory correction. That foreign stuff
was for show. I think lower oil prices has lead to a stronger consumption boost than
initially thought.
am said...
Clicked on this link for the answers but it is 34 blank pages, so i'll go for:
1. No, they'll just devalue when need be to soften the landing. I think they will do another
one before the end of the year.
2. No idea.
3. Near it if you believe the Atlanta Fed. They have a detailed analysis on their blog.
4. 2.2 if you believe the St Louis Fed, end of December for the oil price decline washout from
the system. So inflation will creep up by the end of the year.
5. Yes and more so if they raise the rate.
6. No. because it will just be oil led not wages (see 4).
Anything else: the weather with apologies to PeterK.
anne said...
I am really having increasing trouble understanding, how is it that having a Democratic
President means making sure appointments from the State or Defense Department to the Federal
Reserve are highly conservative and even Republican. Republicans will not even need to elect a
President to have conservatives strewn about the government:
"... do not just own shares in American banks, they own mainly voting shares. It these financial companies that exercise the real control over the US banking system. ..."
Financial holding companies
like the Vanguard Group, State Street Corporation, FMR (Fidelity), BlackRock, Northern Trust, Capital
World Investors, Massachusetts Financial Services, Price (T. Rowe) Associates Inc., Dodge & Cox Inc.,
Invesco Ltd., Franklin Resources, Inc., АХА, Capital Group Companies, Pacific Investment Management
Co. (PIMCO) and several others do not just own shares in American banks, they own mainly voting
shares. It these financial companies that exercise the real control over the US banking system.
Some analysts believe that
just four financial companies make up the main body of shareholders of Wall Street banks. The other
shareholder companies either do not fall into the key shareholder category, or they are controlled
by the same 'big four' either directly or through a chain of intermediaries. Table 4 provides a summary
of the main shareholders of the leading US banks.
Table 4.
Leading institutional shareholders of the
main US banks
Name of shareholder company
Controlled assets, valuation (trillions of dollars; date
of evaluation in brackets)
Number of employees
Vanguard Group
3 (autumn 2014)
12,000
State Street Corporation
2.35 (mid-2013)
29,500
FMR (Fidelity)
4.9 (April 2014)
41,000
Black Rock
4.57 (end of 2013)
11,400
Evaluations of the amount
of assets under the control of financial companies that are shareholders of the main US banks are
rather arbitrary and are revised periodically. In some cases, the evaluations only include the companies'
main assets, while in others they also include assets that have been transferred over to the companies'
control. In any event, the size of their controlled assets is impressive. In the autumn of 2013,
the Industrial and Commercial Bank of China (ICBC) was at the top of the list of the world's banks
ranked by asset size with assets totaling $3.1 trillion. At that point in time, the Bank of America
had the most assets in the US banking system ($2.1 trillion). Just behind were US banks like Citigroup
($1.9 trillion) and Wells Fargo ($1.5 trillion).
"... Organizational culture and behavior is a critical factor in the success of any business. The intense emphasis most American businesses place on numbers to the exclusion of almost any other consideration is a major contributor to the vast amount of corporate control fraud we have witnessed in the past decade or so. ..."
"... One of the fundamental tenets of Reaganism/Libertarianism is that "The Ends Justify the Means." The financial sector is not the only institution in our civilization that is failing due to this mind-set. The best form of regulation is simply holding up a mirror to a firm or agency and asking questions such as, "In this organization, when is it OK to lie?" ..."
Fascinating research. Thanks for posting this, Yves.
Organizational culture and behavior is a critical factor in the success of any business.
The intense emphasis most American businesses place on numbers to the exclusion of almost any
other consideration is a major contributor to the vast amount of corporate control fraud we
have witnessed in the past decade or so.
Unfortunately, I don't see any of these executive psychopaths putting themselves through the
self-assessment that is one of the necessary steps mentioned in the study. At least, not
voluntarily.
Sluggeaux, November 7, 2015 at 11:39 am
Important.
One of the fundamental tenets of Reaganism/Libertarianism is that "The Ends Justify the
Means." The financial sector is not the only institution in our civilization that is failing
due to this mind-set. The best form of regulation is simply holding up a mirror to a firm or
agency and asking questions such as, "In this organization, when is it OK to lie?"
Corruption == inequality: "Corruption is a tax on growth just as inequality is a tax on growth.
Money that could be spent on improving conditions overall winds up in the hands of a small wealthy oligarchy.
The only real difference is legalistic. Technically corruption involves some type of illegality, but
the end results are the same."
Notable quotes:
"... Deregulation, of course. A semantic trick so typical of the IMF. Openness is fair and to manage openness you may need a clear regulatory framework that provides rules and clarity with strong institutions that can ensure compliance. Pushing all the time for deregulation is ideological bias. ..."
"... I like the idea of economist studying the economic effects of corruption. One of the benefits, of course, is that it will bring more to light these rationalizations like the one Ignacio brings up. So if only we didnt have laws against shoplifting then the shoplifter would not have to hide what he was doing or be guilty of a crime ..."
"... Corruption is a tax on growth just as inequality is a tax on growth. Money that could be spent on improving conditions overall winds up in the hands of a small wealthy oligarchy. The only real difference is legalistic. Technically corruption involves some type of illegality, but the end results are the same. ..."
"... This may sound a bit strong, but if you do the math, corruption and relentless upward distribution are the same thing in terms of national accounting. Do the math and youll see. ..."
"... When talking about corruption, everybody focuses on illicit flows of payments, which is of course a primary factor, but I would say the greasing of hands is not the most damaging part, rather it is the associated dereliction of duty and shaping policy and decision making, and initiation, selection, or prioritization of projects not to serve the public benefit (or that of the organizations involved) but to arrange private advantages. ..."
"... the largest problem is not the driving up of the cost though thats bad enough, but the corruption of the very decision making which inevitably leads to not delivering what was needed or requested, but something counterproductive (and not rarely in a way that conveniently enables the next round of graft). ..."
"... In the days of the notoriously corrupt Tammany Hall they used to talk about honest corruption and dishonest corruption. The idea is that honest corruption got the thing built or done, even if the cost was incredibly bloated. Tammany Hall made a point of distributing the loot up and down the line. The big guys would get millions, but every worker on the job got bonus pay, fake overtime and spare parts . ..."
The "C word": A Hidden Tax on Growth, by Vitor Gaspar and Sean Hagan: In recent years, citizens'
concerns about allegations of corruption in the public sector have become more visible and widespread.
From São Paulo to Johannesburg, citizens have taken to the streets against graft. In countries
like Chile, Guatemala, India, Iraq, Malaysia and Ukraine, they are sending a clear and loud message
to their leaders: Address corruption!
Policymakers are paying attention too. Discussing the "C word" has long been a sensitive topic
at inter-governmental organizations like the International Monetary Fund. But earlier this month
at its Annual Meetings in Lima, Peru, the IMF hosted a refreshingly
frank
discussion on the subject. The panel session provided a stimulating debate on definitions
of corruption, its direct and indirect consequences, and strategies for addressing it, including
the role that individuals and institutions such as the IMF can play. This blog gives a flavor
of the discussion. ...
Ignacio said...
Here goes the IMF:
"Openness of the economy through deregulation and liberalization will also help since
overly-regulated economies create strong incentives to maintain corrupt practices."
Deregulation, of course. A semantic trick so typical of the IMF. Openness is fair and to
manage openness you may need a clear regulatory framework that provides rules and clarity with
strong institutions that can ensure compliance. Pushing all the time for deregulation is ideological
bias.
djb -> anne...
I like the idea of economist studying the economic effects of corruption. One of the benefits,
of course, is that it will bring more to light these rationalizations like the one Ignacio brings
up. So if only we didn't have laws against shoplifting then the shoplifter would not have to hide
what he was doing or be guilty of a crime
Corruption is a tax on growth just as inequality is a tax on growth. Money that could be
spent on improving conditions overall winds up in the hands of a small wealthy oligarchy. The
only real difference is legalistic. Technically corruption involves some type of illegality, but
the end results are the same.
This may sound a bit strong, but if you do the math, corruption and relentless upward distribution
are the same thing in terms of national accounting. Do the math and you'll see.
cm -> kaleberg...
When talking about corruption, everybody focuses on illicit flows of payments, which is
of course a primary factor, but I would say the greasing of hands is not the most damaging part,
rather it is the associated dereliction of duty and shaping policy and decision making, and initiation,
selection, or prioritization of projects not to serve the public benefit (or that of the organizations
involved) but to arrange private advantages.
If it were only about the money, it would be more like being slightly overcharged on the bill,
but still getting what you ordered or needed.
cm -> cm...
Of course not to forget the lining of pockets. But my main point still stands - the largest
problem is not the driving up of the cost though that's bad enough, but the corruption of the
very decision making which inevitably leads to not delivering what was needed or requested, but
something counterproductive (and not rarely in a way that "conveniently" enables the next round
of graft).
kaleberg -> cm...
In the days of the notoriously corrupt Tammany Hall they used to talk about honest corruption
and dishonest corruption. The idea is that honest corruption got the thing built or done, even
if the cost was incredibly bloated. Tammany Hall made a point of distributing the loot up and
down the line. The big guys would get millions, but every worker on the job got bonus pay, fake
overtime and "spare parts".
likbez said...
IMF neoliberal perspective on governance failed to highlight the major source of corruption
-- neoliberalism as a social system.
Over recent years, IMF and World Bank have been promoting an artificially constructed discourse
on corruption that separates it from its historic narrative -- the neoliberal political system
under which it now flourish. They use pretty elaborate smoke screen designed to hide the key issues
under the set of fuzzy terms such as "transparency", "accountability", "governance", "anticorruption
initiatives". Ignoring the socio-political role of corruption as the key mechanism of the neoliberal
debt enslavement of peripheral nations (see Confessions of an Economic Hit Man - Wikipedia )
Privatization might well be the most widespread type of corruption which occurs when an office-holder
or other governmental employee acts in an official capacity to sell government property for pennies
on the dollar to local oligarchs of international companies. With delayed payment via the "revolving
door" mechanism.
If we assume that corruption is 'illegitimate use of public power to benefit a private interest"
then neoliberalism is the most corrupt social system imaginable.
But in neoliberal ideology only the state is responsible for corruption. The private sector under
neoliberalism is immune of any responsibility. In reality it is completely opposite and state
represents a barrier to private companies especially international sharks to get unfair advantage.
And they can use the USA embassy as a source of pressure instead of bribing government officials.
Neoliberals argues without any proof that if the market is let to function through its own mechanisms,
and the role of state diminished to a minimum regulatory role, "good governance" could be realized
and corruption be diminished. As US subprime crisis has shown this is untrue and destroys the
stability of the economy.
Actually the term "governance" serves as the magical universal opener in neoliberal ideology.
It is ideologically grounded up the narrative of previous mismanagement of economy ("blame the
predecessor" trick).
This assumes the ideal economic sphere, in which players somehow get an equal opportunities
automatically without regulatory role of the state and in case of peripheral nations without being
strong armed by more powerful states. Under neoliberalism ethical responsibilities on players
are reduced to the loyalty to contract.
Moreover antisocial behavior under liberalism is explicitly promoted (" greed is good") and
the West serves as a "treasure vault" for stolen money and provides "safe heaven" for corrupt
officials that face prosecution. At least this is true for Russian oligarchs when each crook automatically
became "fighter for freedom" after landing in London airport and stolen money are indirectly appropriated
by British state and never returned to Russia.
The USA is very similar. It likes to condemn corruption but seldom returns that money stolen
-- for example it never returned to Ukraine money stolen by Ukrainian Prime minister under President
Kuchma Pavlo Lazarenko (https://en.wikipedia.org/wiki/Pavlo_Lazarenko)
.
gunste said...
Applied Republican ideology is operating and legislating in favor of money donors and their
businesses. It is America's legalized corruption and bribery.
Yves here. Tax is a major way to create incentives. New York City increased taxes dramatically
on cigarettes, and has tough sanctions for trying to smuggle meaningful amounts of lower-taxed smokes
in. Rates of smoking did indeed fall as intended.
Thus the debate about whether corporations should pay more taxes is not "naive" as the plutocrats
would have you believe; in fact, they wouldn't be making such a big deal over it if it were. In the
1950s, a much larger percentage of total tax collections fell on corporations than individuals. And
the political message was clear: the capitalist classes needed to bear a fair share of the total
tax burden. Similarly, what has been the result of the preservation of a loophole that allows the
labor of hedge fund and private equity fund employees to be taxed at preferential capital gains rates?
A flood of "talent" into those professions at the expense of productive enterprise.
And the result of having lower taxes on companies has been a record-high corporate profit share
of GDP, with none of the supposed benefits of giving businesses a break. Contrary to their PR, large
companies have been net saving, which means liquidating, since the early 2000s. The trend has become
more obvious in recent years as companies have borrowed money to buy back their own stock.
In the past year, scandal after scandal has exposed companies using loopholes in the tax system
to avoid taxation. Now more than ever, it is becoming clear that citizens around the world are paying
a high price for the crisis in the global tax system, and the discussion about multinational corporations
and their tax tricks remains at the top of the agenda. There is also a growing awareness that the
world's poorest countries are even harder impacted than the richest countries. In effect, the poorest
countries are paying the price for a global tax system they did not create.
A large number of the scandals that emerged over the past year have strong links to the EU and its
Member States. Many eyes have therefore turned to the EU leaders, who claim that the problem is being
solved and the public need not worry. But what is really going on? What is the role of the EU in
the unjust global tax system, and are EU leaders really solving the problem?
This
report – the third
in a series of reports – scrutinises the role of the EU in the global tax crisis, analyses developments
and suggests concrete solutions. It is written by civil society organisations (CSOs) in 14 countries
across the EU. Experts in each CSO have examined their national governments' commitments and actions
in terms of combating tax dodging and ensuring transparency.
Each country is directly compared with its fellow EU Member States on four critical issues: the fairness
of their tax treaties with developing countries; their willingness to put an end to anonymous shell
companies and trusts; their support for increasing the transparency of economic activities and tax
payments of multinational corporations; and their attitude towards letting the poorest countries
have a seat at the table when global tax standards are negotiated. For the first time, this report
not only rates the performance of EU Member States, but also turns the spotlight on the European
Commission and Parliament too.
This report covers national policies and governments' positions
on existing and upcoming EU level laws, as well as global reform proposals.
Overall, the report finds that:
• Although tweaks have been made and some loopholes have been closed, the complex and dysfunctional
EU system of corporate tax rulings, treaties, letterbox companies and special corporate tax regimes
still remains in place. On some matters, such as the controversial patent boxes, the damaging
policies seem to be spreading in Europe. Defence mechanisms against 'harmful tax practices' that
have been introduced by governments, only seem partially effective and are not available to most
developing countries. They are also undermined by a strong political commitment to continue so-called
'tax competition' between governments trying to attract multinational corporations with lucrative
tax reduction opportunities – also known as the 'race to the bottom on corporate taxation'. The
result is an EU tax system that still allows a wide range of options for tax dodging by multinational
corporations.
• On the question of what multinational corporations pay in taxes and where they
do business, EU citizens, parliamentarians and journalists are still left in the dark, as are
developing countries. The political promises to introduce 'transparency' turned out to mean that
tax administrations in developed countries, through cumbersome and highly secretive processes,
will exchange information about multinational corporations that the public is not allowed to see.
On a more positive note, some light is now being shed on the question of who actually owns the
companies operating in our societies, as more and more countries introduce public or partially
public registers of beneficial owners. Unfortunately, this positive development is being somewhat
challenged by the emergence of new types of mechanisms to conceal ownership, such as new types
of trusts.
• Leaked information has become the key source of public information about tax dodging by multinational
corporations. But it comes at a high price for the people involved, as whistleblowers and even
a journalist who revealed tax dodging by multinational corporations are now being prosecuted and
could face years in prison. The stories of these 'Tax Justice Heroes' are a harsh illustration
of the wider social cost of the secretive and opaque corporate tax system that currently prevails.
• More than 100 developing countries still remain excluded from decision-making processes when
global tax standards and rules are being decided. In 2015, developing countries made the fight
for global tax democracy their key battle during the Financing for Development conference (FfD)
in Addis Ababa. But the EU took a hard line against this demand and played a key role in blocking
the proposal for a truly global tax body.
Not one single EU Member State challenged this approach and, as a result, decision-making on global
tax standards and rules remains within a closed 'club of rich countries'.
A direct comparison of
the 15 EU countries covered in this report finds that:
France, once a leader in the demand for public access to information about what multinational
corporations pay in tax, is no longer pushing the demand for corporate transparency. Contrary
to the promises of creating 'transparency', a growing number of EU countries are now proposing
strict confidentiality to conceal what multinational corporations pay in taxes.
Denmark and Slovenia are playing a leading role when it comes to transparency around the true owners
of companies. They have not only announced that they are introducing public registers of company
ownership, but have also decided to restrict, or in the case of Slovenia, avoided the temptation
of introducing, opaque structures such as trusts, which can offer alternative options for hiding
ownership. However, a number of EU countries, including in particular Luxembourg and Germany,
still offer a diverse menu of options for concealing ownership and laundering money.
Among the
15 countries covered in this report, Spain remains by far the most aggressive tax treaty negotiator,
and has managed to lower developing country tax rates by an average 5.4 percentage points through
its tax treaties with developing countries.
The UK and France played the leading role in blocking developing countries' demand for a seat at
the table when global tax standards and rules are being decided.
To read a summary of the report,
please click here.
Class Actions vs. Individual Prosecutions
Jed S. Rakoff NOVEMBER 19, 2015 NYRB
Entrepreneurial Litigation: Its Rise, Fall, and Future
by John C. Coffee Jr.
Harvard University Press, 307 pp., $45.00
"... Lehman was engaging in blatant misreporting, treating these "repos" (in which a bank still shows them on its balance sheet as sold with the obligation to repurchase) as sales ..."
"... "It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations…." ..."
"... Although I hope the bank's newly appointed CEO is able to implement measures to rectify these problems, if DB "goes Lehman", I suspect it will occur much as Lehman did: quite suddenly. ..."
"... The 5% "fee" referred to in the fourth paragraph of the FT excerpt above is not the interest rate charged on the loan but instead is the over-collateralization amount provided by Lehman in exchange for a short-term cash loan. A normal repo loan is over-collateralized at perhaps 2%. Lehman's and its outside auditors Ernst Young's 'genius' was in discovering some language in 2001 or so in the then recently amended FAS 157 accounting guidance (all such guidance has been revised and renumbered in the meantime) which suggested indirectly that if the rate of over-collateralization was bumped up enough, you could pretend you sold the collateral instead of pledging it as collateral. So instead of pledging the normal 102% of the loan amount in collateral, Lehman asked lenders to please take more than that: 105%, hence "Repo 105." ..."
"... Most of Lehman's lenders wouldn't touch the scam because it was so obvious, but a few non-U.S. banks were happy to oblige Lehman. One was Deutsche Bank, to the tune of many billions of dollars over the years. Not that that had anything to do with ex-Deutsche General Counsel for the Americas Rob Khuzami's decision, once he became Obama's Enforcement Head at the SEC beginning in 2009, to give Lehman, EY, Deutsche and the other lenders a pass on all that. ..."
"... In no way did the drafters of the accounting guidance ever say, here's a way to scam the market, have at it. But then again those drafters are a committee of CPAs from all the big firms and elsewhere, including several from EY. So who knows how deliberate the set up was. ..."
"... Deutsche Bank has hugely profited from the end of the Deutschland AG at which head it once was. Thanks to chancellour Schroeder and his finance minister Eichle (the successor after Lafontaine was kicked who went on to found the left party) Deutsche and the other big German banks got to sell their industry portfolios without paying a penny of tax. It is common knowledge among industry watchers that this money ended up as bonuses for the "masters of the universe" at the Anglo-Saxon part of the bank which basically took over the whole bank. First invisibly and then all to visible when Jain became CEO. German industry is now owned by Blackrock and the like. Homi soit qui mal y pense ..."
"... Geithner's amorality and dereliction of duty has been apparent since his testimony in Starr v USA. Somehow these big names are protected by the supine media. ..."
"... Couldn't the NY State Superintendent of Financial Services pull Deutsche's U.S. Banking License? I thought this is what Ben Lawsky was intimating in this (nearly) one year old interview on Bloomberg, in which he (hints at?) the pulling of Deutsche's license, even though he was not at the time talking about Repo 105 ..."
Lehman was engaging in blatant misreporting, treating these "repos" (in which a bank still
shows them on its balance sheet as sold with the obligation to repurchase) as sales
Thank you for writing this bit. All the explanations I've read of Repo 105 seemed to be missing
the step where liabilities were actually reduced – because what's the difference between an asset
and an obligation/contract to buy said asset in X hours time?
So I'm glad a more financially astute mind than mind wrote down what I'd suspected, that real
liabilities weren't actually reduced by Repo 105 and it's just window dressing to fool the regulators.
I'd hazard that it actually makes the situation worse, because it's pretty expensive window dressing
and that's real cash that has to head out the door once a quarter.
tawal
Turning all the brokerages into bank holding companies, where now they all have a calendar
year end and can't temporarily hide their trash on each other's books, but can all hide it on
the Fed's unaudited balance sheet.
Why isn't Deutsche Bank doing this too, and are UBS, Barclays and HSBC the next to fail?
fresno dan
"It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict
in the performance of their duties, and may well be culpable in aiding and abetting Lehman in
accounting fraud and Sarbox violations…."
Upon finding this out, tire squeal, sirens wail, lights flash, and grim faced men rush to take
into custody little Timmy Geithner and serve warrants a the New York FED….
LOL – of course not. Most government officials, of BOTH parties, would say Timmy Geithner and
his ilk performed fantastically…. After all, he worked hard to prop it up…. If you remove the corruption, the double and self dealing,
price fixing, fraud, ad infinitum, and how could the system continue as constituted? And the people
at the top of the system thinks it works very well indeed.
Chauncey Gardiner
This issue is unsurprising to me. Many signs over the past couple years of deeply troubling
matters at this TBTF: CEO resignations, NY Fed criticisms of systems and financial reporting (as
Yves pointed out), participation in market manipulations, billions in writedowns, suicide death
of bank's regulatory lawyer, massive derivatives exposures, central bank calls for increased capital,
etc.
Although I hope the bank's newly appointed CEO is able to implement measures to rectify these
problems, if DB "goes Lehman", I suspect it will occur much as Lehman did: quite suddenly.
Recalling Ernest Hemingway in "The Sun Also Rises": "How did you go bankrupt?" Bill asked. "Two ways," Mike said. "Gradually and then suddenly."
JustAnObserver
Deutche Bank = Germany's RBS (Royal Bank of Scotland) ?
All the Eurozone's nightmares since 2010 have been down to a desperate attempt to postpone
DB's "Minsky Moment" ?
I did see a report that DB is withdrawing from a number of countries but Wall Street wasn't
on that list. Interestingly the list includes all the Scandinavian countries as well as the usual
suspects – Mexico, Turkey, Saudi, etc.
Oliver Budde
The 5% "fee" referred to in the fourth paragraph of the FT excerpt above is not the interest
rate charged on the loan but instead is the over-collateralization amount provided by Lehman in
exchange for a short-term cash loan. A normal repo loan is over-collateralized at perhaps 2%.
Lehman's and its outside auditors Ernst & Young's 'genius' was in discovering some language in
2001 or so in the then recently amended FAS 157 accounting guidance (all such guidance has been
revised and renumbered in the meantime) which suggested indirectly that if the rate of over-collateralization
was bumped up enough, you could pretend you sold the collateral instead of pledging it as collateral.
So instead of pledging the normal 102% of the loan amount in collateral, Lehman asked lenders
to please take more than that: 105%, hence "Repo 105."
Most of Lehman's lenders wouldn't touch the scam because it was so obvious, but a few non-U.S.
banks were happy to oblige Lehman. One was Deutsche Bank, to the tune of many billions of dollars
over the years. Not that that had anything to do with ex-Deutsche General Counsel for the Americas
Rob Khuzami's decision, once he became Obama's Enforcement Head at the SEC beginning in 2009,
to give Lehman, EY, Deutsche and the other lenders a pass on all that.
The few banks who did dare to help out Lehman of course charged higher than market rates for
those loans, even though they held an extra 3% in collateral, which was always made up of high
quality Treasury bonds and the like. Those lenders charged more anyway, because they knew what
Lehman was up to and knew they could wring out some extra cash in exchange for 'aiding' Lehman
in its needs. Lehman gladly paid the higher interest.
In no way did the drafters of the accounting guidance ever say, here's a way to scam the market,
have at it. But then again those drafters are a committee of CPAs from all the big firms and elsewhere,
including several from EY. So who knows how deliberate the set up was.
The scam began in 2001 or so and while it may not have been what blew up Lehman in 2008, it
did importantly mislead a lot of people in 2007 and 2008, when its use was ramped up dramatically.
And it put extra bonus money into the Lehman executives' pockets, year in and year out. No wonder
others seek to emulate it.
Tom
Deutsche Bank has hugely profited from the end of the Deutschland AG at which head it once
was. Thanks to chancellour Schroeder and his finance minister Eichle (the successor after Lafontaine
was kicked who went on to found the left party) Deutsche and the other big German banks got to
sell their industry portfolios without paying a penny of tax. It is common knowledge among industry
watchers that this money ended up as bonuses for the "masters of the universe" at the Anglo-Saxon
part of the bank which basically took over the whole bank. First invisibly and then all to visible
when Jain became CEO. German industry is now owned by Blackrock and the like. Homi soit qui mal
y pense
RBHoughton
Geithner's amorality and dereliction of duty has been apparent since his testimony in Starr
v USA. Somehow these big names are protected by the supine media.
Thank Heavens for NC – one of the most important of a handful of sites that fearlessly report.
Fingers crossed we can build a new media industry around this nexus of quality.
Pearl
Yves,
Couldn't the NY State Superintendent of Financial Services pull Deutsche's U.S. Banking License? I thought this is what Ben Lawsky was intimating in this (nearly) one year old interview on
Bloomberg, in which he (hints at?) the pulling of Deutsche's license, even though he was not at
the time talking about Repo 105:
If enough folks became vocal (enough) about the issue–couldn't we make a difference this time?
("We," as in ordinary housewives from Roswell, GA and humble bloggers such as the illustrious
Yves Smith?".) ;-)
I think you are waaaay more famous than you think you are, Yves. Indeed, you are universally
one of the most well-respected and straight-shooting authors/academics/authorities on such subjects.
And I think Mr. Lawsky would take your call or reply to an email if written by you.
I spoke with his staff (yes, me–a housewife from Roswell, GA) when he was at DFS during my
"Ocwiteration Perseveration" days of yore, and his staff was unusually generous with their time
and they seemed genuinely appreciative to get info and feedback from just regular folks.
I think Mr. Lawsky himself would be thrilled to hear from someone like you. And I think the two of you would be an extremely formidable team.
I just don't want to give up on this. It's too important. At the very least, I will forward
to him this post of yours.
"... Dilemmas of Domination contends that the US has entered into a period of decline as the world's hegemon. ..."
"... Because the US dominates international financial institutions like the IMF, World Bank and most of the regional development banks, their imposition of neo-liberal structural adjustments programs has led to a revolt against their destructive policies as witnessed by the left ferment especially in Latin America but also in the rest of the global South. ..."
"... I've read lots of books about globalization and free trade but none exposes the uneven playing field of free trade as good as Walden Bello. He shows that not only the evenness of playing field but also how the way U.S. is imprudently trying to dominate the world by adapting short sighted policies. These kind of policies have become the distinctive mark of recent American ideology domestically and foreign. ..."
The problems of the US mount daily from a ballooning deficit to heightened opposition from multiplying
points on the globe. Walden Bello's Dilemmas of Domination is a tour de force dissection of the causes
of these mounting problems.
He argues from an objective and non-partisan position in the global South.
Because he primarily works outside of the US and because his method relies heavily on history, his account
is compelling.
Dilemmas of Domination contends that the US has entered into a period of decline as
the world's hegemon. Three crises characterize the loss of power and prestige.
The first crisis is the problem
of manufacturing and raw materials overproduction that leads to a decline in profits, and as wages are
squeezed to stabilize profits demand falls further. Added to these problems is the fact that the US,
the consumer of last resort, cannot continue to borrow and buy forever. The IOUs to the rest of the
world will eventually have to be repaid.
A second critical problem is military overextension. According
to Bello, the wars on Afghanistan and Iraq demonstrate the US is not invincible. If it were, how could
guerillas continue to move about these occupied nations so freely and make nation-building into such
a farce? The US military is so strained that it has to hire mercenaries from companies like Blackwater
to protect its corporate interests abroad because a draft would undermine all of its imperial adventures.
The third crisis, perhaps the most enduring, is legitimacy. Ideologically, the US has lost its currency
to lead the world. Because the US dominates international financial institutions like the IMF, World
Bank and most of the regional development banks, their imposition of neo-liberal structural adjustments
programs has led to a revolt against their destructive policies as witnessed by the left ferment especially
in Latin America but also in the rest of the global South. Furthermore, the US bullying and sometimes
insulting treatment of the UN has further sullied the US's reputation. Added to this international delegitimation
is the quagmire of domestic politics from the surrender of civil liberties to the patently obvious corporate
control of both major parties. For readers looking for a rich and clear formulation of why the US government
is detested and feared by much of the earth's population this is the best primer.
Khalid S. Al Khateron October 26, 2005
Free trade as a tool for domination
I've read lots of books about globalization and free trade but none exposes the uneven
playing field of free trade as good as Walden Bello. He shows that not only the evenness of
playing field but also how the way U.S. is imprudently trying to dominate the world by
adapting short sighted policies. These kind of policies have become the distinctive mark of
recent American ideology domestically and foreign.
Luc REYNAERT, November 4, 2005
The weak must hang together, otherwise they hang separately
In this stringent view from the South, Walden Bello discerns three different crisis levels
beleaguering the US world domination: a military, a judicial and an economical level.
On the military front, the Iraq war shows clearly the limits of interventions: 'today the
entire US military is either in Iraq, returning from Iraq or getting ready to go.' The lesson
for the South is that the US military supremacy can be brought to a halt with guerrilla
warfare. A sledgehammer is useless in swatting flies.
On the judicial front, the US is loosing its legitimacy. In Western societies, enhancement
of individual freedom and democratic representation are the ideological cornerstones of the
regime. Nationally, recognized human rights (no access to personal information, privacy) are
jeopardized in the US by the Patriot Act in the name of the war against terrorism. For Walden
Bello, the US government is becoming authoritarian, because it is in the hands of the
military-industrial complex, which functions on a risk-free, cost-plus basis and grabs one
half of the US budget. He quotes judiciously William Pfaff: 'The military is already the most
powerful institution in the US government, largely unaccountable to the executive branch.'
Internationally, consensus and multilateralism are needed through international
institutions. However, the US behaves unilaterally. Dealings with the South are subordinated
to strategic considerations (R. Zoellick: 'countries that seek free trade agreements with the
US must cooperate on its foreign policy goals.') Walden Bello's analysis of the WTO agreements
is devastating. He calls them a free trade monopoly in the hands of corporate interests. WTO's
agreement on Agriculture is not less than 'Socialism for the Rich'. The result is that the US
democratic messianism is seen as sheer hypocrisy by the rest of the world.
Economically, some of Walden Bello's arguments are a little of the mark. Finite natural
resources and ecological space are demographic problems. The conflict between a minority in
command of assets and the majority of the population is a trade union and an election problem.
But some of his arguments are to the point. There is a widening inequality gap in the US: the
richest 1% of the population pocketed more than half the benefit of the latest tax reduction.
The actual US budget and trade deficits are unsustainable in the long run and certainly if the
inflow of foreign capital comes to a halt.
Finally, there is a new hegemon at the horizon: China with its state-assisted capitalism.
The author summarizes brilliantly China's behavior: 'nations have no permanent friends, only
permanent interests.'
But what should the South do in the meantime: regional economic blocks, G-20, South-South
cooperation, because 'the weak must hang together, otherwise they will hang separately'.
Walden Bello's hard hitting analysis of current events should be a vademecum for all
politiciams and laymen. A must read. In this context, I also recommend the works of Nafeez
Mosaddeq Ahmed and Noreena Hertz.
"... The difficulty we have in the economics profession, I fear, is a great deal of herd instinct and concern about what others may say. And when the Fed runs their policy pennants up the flagpole, only someone truly secure in their thinking, or forsworn to some strong ideological interpretation of reality or bias if we are truly honest, dare not salute it. ..."
"... But it makes the point which I have made over and again, that all of the economic models are faulty and merely a caricature of reality. And therefore policy ought not to be dictated by models, but by policy objectives and a strong bias to results, rather than the dictates of process or methods. In this FDR had it exactly right. If we find something does not stimulate the broader economy or effect the desired policy objective, like tax cuts for the rich, using that approach over and over again is certainly not going to be effective. ..."
"... Economics are a form of social and political science. And with the political and social process corrupted by big money, what can we expect from would be philosopher kings. ..."
"... The interconnectedness of the global system with its massive and underregulated TBTF Banks, the widespread and often fraudulent mispricing of risk, all make cause for a financial system to be fragile. In this thinking Nassim Taleb is far ahead of the common economic thought as a real systems thinker. The Fed is not a systemic thinking organization because they are owned by the financial status quo, and real systemic reform rarely comes from within. ..."
"... So Mr. Baker, rather than looking for the bubble, lets say we have a fragile system still disordered and mispricing risk, with a few very large banks engaging in reckless speculation, mispricing risk for short term profits, manipulating markets, and distorting the processes designed to maintain a balance in the economy. Rather than hold out for a new bubble as your criterion, perhaps we may also consider that the patient is still on full life support after the last bubble and crisis. Why do we need to find a new source of malady when the old one is still having its way? ..."
"... A new crisis does not have to happen. This is the vain comfort in these sorts of black swan events, being hard to predict. But they can be more likely given the right conditions, and I fear little will be done about this one until even those who are quite personally comfortable with things as they are begin to feel the pain, ..."
"... neither Irwin nor anyone else has even identified a serious candidate. Until someone can at least give us their candidate bubble, we need not take the financial crisis story seriously. ..."
"... If we take this collapse story off the table, then we need to reframe the negative scenario. It is not a sudden plunge in output, but rather a period of slow growth and weak job creation. This seems like a much more plausible story... ..."
I like Dean Baker quite well, and often link to his columns.
On most things we are pretty much on the same page.
And to his credit he was one of the few 'mainstream'
economists to actually see the housing bubble developing, and call it out. Some may claim to have
done so, and can even cite a sentence or two where they may have mentioned it, like Paul Krugman
for example. But very few spoke about doing something about it while it was in progress. The
Fed was aware according to their own minutes, and ignored it.
The difficulty we have in the economics profession, I fear, is a great deal of herd instinct and
concern about what others may say. And when the Fed runs their policy pennants up the flagpole, only
someone truly secure in their thinking, or forsworn to some strong ideological interpretation of
reality or bias if we are truly honest, dare not salute it.
Am
I such a person? Do I actually see a fragile financial system that is still corrupt and highly levered,
grossly mispricing risks? Or am I just seeing things the way in which I wish to see them?
That difficulty arises because economics is no science. It involves judgment and principles,
and weighs the facts far too heavily based upon 'reputation' and 'status.' And of course I have none
of those and wish none.
But it makes the point which I have made over and again, that all of the economic models are faulty
and merely a caricature of reality. And therefore policy ought not to be dictated by models,
but by policy objectives and a strong bias to results, rather than the dictates of process or methods.
In this FDR had it exactly right. If we find something does not stimulate the broader economy
or effect the desired policy objective, like tax cuts for the rich, using that approach over and
over again is certainly not going to be effective.
Economics are a form of social and political science. And with the political and social
process corrupted by big money, what can we expect from would be 'philosopher kings.'
The housing bubble was no 'cause' of the latest financial crisis. More properly it was the tinder
and the trigger event. The S&L crisis was just as great, if not greater. Why then did it not bring
the global financial system to its knees?
The interconnectedness of the global system with its massive and underregulated TBTF Banks, the
widespread and often fraudulent mispricing of risk, all make cause for a financial system to be 'fragile.'
In this thinking Nassim Taleb is far ahead of the common economic thought as a real 'systems thinker.'
The Fed is not a systemic thinking organization because they are owned by the financial status quo,
and real systemic reform rarely comes from within.
I see the same fragility which existed from 1999 to 2008 still in the system, only grown larger,
global, and more profoundly influencing the political processes.
The only question is what 'trigger event' might set it spinning, and how great of a magnitude
will it have to be in order to do so. The more fragile the system, the less that is required to knock
it off its underpinnings.
And a crisis is not a binary event. There is the 'trigger' and the dawning perception of risks,
and the initial responses of the political, social, and regulatory powers.
There is no point in debating this, because the regulators and powerful groups like the Fed are
caught in a credibility trap, which prevents them from seeing things as they are, and saying so.
So Mr. Baker, rather than looking for the bubble, let's say we have a fragile system still disordered
and mispricing risk, with a few very large banks engaging in reckless speculation, mispricing risk
for short term profits, manipulating markets, and distorting the processes designed to maintain a
balance in the economy. Rather than hold out for a 'new bubble' as your criterion, perhaps we may also consider that the
patient is still on full life support after the last bubble and crisis. Why do we need to find
a new source of malady when the old one is still having its way?
I think if one exercises clear and open judgement, they can see that we have stirred up the same
pot of witches brew that has made the system fragile and vulnerable to an exogenous shock, and has
kept it so.
A new crisis does not have to happen. This is the vain comfort in these sorts of 'black swan'
events, being hard to predict. But they can be more likely given the right conditions, and
I fear little will be done about this one until even those who are quite personally comfortable with
things as they are begin to feel the pain,
The problem is not a 'bubble.' The problem is pervasive corruption, fraud, and lack of meaningful
reform. The 'candidate' is the financial system itself, with its outsized hedge funds and the
TBTF Banks with their serial crime sprees and accommodative regulators in particular.
And if one cannot see that in this rotten system with its brazenly narrow rewarding of a select
few with the bulk of new income, then there is little more that can be said.
Neil Irwin, a writer for the NYT Upshot section, had
an interesting debate with himself about the likely future course of the economy. He got the
picture mostly right in my view, with a few important qualifications.
"First, his negative scenario
is another recession and possibly a financial crisis. I know a lot of folks are saying this stuff,
but it's frankly a little silly. The basis of the last financial crisis was a massive amount of
debt issued against a hugely over-valued asset (housing). A financial crisis that actually rocks
the economy needs this sort of basis.
If a lot of people are speculating in the stock of Uber or other wonder companies, and reality
wipes them out, this is just a story of some speculators being wiped out. It is not going to shake
the economy as a whole. (San Francisco's economy could take a serious hit.)
Anyhow, financial crises don't just happen, there has to be a real basis for them. To me the
housing bubble was pretty obvious given the unprecedented and unexplained run-up in prices in
the largest market in the world. Perhaps there is another bubble out there like this, but neither
Irwin nor anyone else has even identified a serious candidate. Until someone can at least
give us their candidate bubble, we need not take the financial crisis story seriously.
If we take this collapse story off the table, then we need to reframe the negative scenario.
It is not a sudden plunge in output, but rather a period of slow growth and weak job creation.
This seems like a much more plausible story...
Anyhow, a story of slow job growth and ongoing wage stagnation would look like a pretty bad
story to most of the country. It may not be as dramatic as a financial crisis that brings the
world banking system to its knees, but it is far more likely and therefore something that we should
be very worried about."
"... Wage slavery is VERY different from chattel slavery. The danger of ignoring that difference is that it obscures the intimate connection between the two, which is the legal institution of private property. ..."
"... The Roman law of property derived by analogy from conditions of slave ownership. Owning land is an analog of owning slaves. ..."
"... Born in debt. Live in debt. Die in debt. The one thing they got right: human slavery is so distasteful we can't do it openly anymore. But wage slavery is just fine, especially debt peonage. No one can complain if you get yourself into debt, just if someone else puts you there. ..."
"... I hate my job. I am de facto a day laborer, delivering items as and when my boss tells me to. As a former university professor, this is a hard blow. But to say I and 99.9% of the population are coffled is pure nonsense. My situation is lousy. But comparing what the black slaves went through with what I am going through is like saying the internment camps which held the Japanese-Americans were the same as the death camps in Nazi Germany. One was bad, the other indescribably worse. Not all evils are identical or commensurate. ..."
"... Any adequate reading of the history of the Civil War will show that the 11 Confederate States destroyed themselves out of lust to extend slavery to the northwestern states. They had through "compromises" extended slavery to the states south of Missouri already. The threat of urbanization and immigration creating enough free voters to outvote their 1.6 people gerrymanders terrified the Southern powers-that-be to the point of pre-emptive war. Read the Secession declarations of each state; believe them for what they say, not the subsequent reunion-period histories. ..."
"... The economic benefits of the internal slave breeding industry were matched by the political benefits; they could try to outbreed the Northern increase through immigration and make profits off sales to western states. ..."
"... David Graeber's book (Debt: The first 5000 years) convincingly relates debt directly to slavery, real slavery. Creditors ("masters") rigged the game, took all their debtors assets, and when there was nothing left for them to take, they took them, as slaves. Or their wives, daughters, sons. I know, ancient slavery was different in some respects; slaves could earn their way out or be "redeemed" by a family member or other creditor. (And there was the Jubilee year – I have to read Michael Hudson on that someday.) I can accept that American chattel slavery was distinct and diabolical, but it was an intense form of something that seems to have been with us, humanity, for a long time. ..."
"... The westward expansion after the War of 1812 and the closure of the overseas slave trade in 1808 created the conditions for the internal slave breeding industry with its generation of roving coffles and slave traders, it major slave markets, a good many of which have been preserved, and its new forms of finance and legal entities. ..."
"... Yes, Graeber's book is excellent on this point: "Slavery is the ultimate form of being ripped from one's context, and thus from all social relationships that make one a human being. Another way to put this is that the slave is, in a very real sense, dead." ..."
"... The important point. The United States of America (Lincoln) did not want to fight. The abolitionists were a minority. The Southern media (newspaper editors) freaked out like to media shock jocks did over the election of Barack Obama. Unlike this time around, at least so far, the Southern states were stampeded by their elites into seceding; the state legislatures and governors were part of those elites. In the midst of the tension Edmund Ruffin, a pro-secessionist rabble-rouser from Virginia went to Charleston SC, and with the help of military school Citadel and Arsenal cadets, and SC militia, conducted a coast artillery attack on the closest military installation – Fort Sumter. And reactions escalated, very much like the diplomatic environment after the the 1914 assassination of Archduke Franz Ferdinand. And they escalated because the Southern hotheads wanted war. ..."
"... Regarding the coffle, it seems this is early capitalism's answer to the "Trail of Tears" and the famous "Bataan Death March". Then again, maybe it's not "early" capitalism at all….I'm thinking of Malaysia and the TPP. ..."
"... Many years ago I visited a small slavery museum out in the cotton fields somewhere around Memphis - I forget which side of the river it was on. It was in an old house that might be found anywhere, but more likely in a suburb than far out in the cotton fields, with no other house in view. Even the nearest line of trees was hundreds of yards away. In the largest room they had a lot of chains with large, heavy links, bigger than you would think would be necessary to hold even a very active human being. ..."
"... Slavery in the US was rather tame and short lived in comparison to the slavery practiced by the Muslims and Africans themselves. ..."
"... It was not until 1960 that slavery was outlawed in Saudi Arabia although it may well continue to this day. To really understand large scale slavery we need to go back to the origins of the Muslim movement. ..."
"... Hi Lambert, the book that first put the scope of the slave trading and breeding industries into context for me was The World That Made New Orleans by Ned Sublette. It's a fascinating and terrible account and if I recall correctly, describes some of the slave breeding operations carried out by Thomas Jefferson. ..."
… About a quarter of those trafficked southward were children between eight and fifteen, purchased
away from their families. The majority of coffle prisoners were male: boys who would never again
see their mothers, men who would never again see wives and children. … The only age bracket in
which females outnumbered males in the trade was twelve to fifteen, when they were as able as
the boys to do field labor, and could also bear children. Charles Bell, forcibly taken from Maryland
to South Carolina in 1805, recalled that
The women were merely tied together with a rope, about the size of a bed cord, which was
tied like a halter round the neck of each; but the men…. were very differently caparisoned.
A strong iron collar was closely fitted by means of a padlock around each of our necks. A chain
of iron, about a hundred feet in length, was passed through the hasp of each padlock, except
at the two ends, where the hasps of the padlock passed through a link in the chain. In addition
to this, we were handcuffed in pairs, with iron staples and chains, with a short chain, uniting
the handcuffs and their wearers in pairs.
As they tramped along, coffles were typically watched over by whip- and gun-wielding men on
horseback and a few dogs, with supply wagons bringing up the rear… The captives were not generally
allowed to talk among themselves as they tramped along, but sometimes, in the midst of their suffering,
they were made to sing. The English geologist G. W. Featherstonehaugh, who in 1834 happened upon
the huge annual Natchez-bound chain gang led by trader John Armfield, noted that "the slave drivers…
endeavour to mitigate their discontent by feeding them well on the march, and by encouraging them"
- encouraging them? - "to sing 'Old Virginia never tire,' to the banjo. Thomas William
Humes, who saw coffles of Virginia-born people passing through Tennessee in shackles on the way
to market, wrote; "It was pathetic to see them march, and to hear their melodious voices in plaintive
singing as they went."…
From the first American coffles on rough wilderness treks along trails established by the indigenous
people, they were the cheapest and most common way to transport captives from one region to another.
The Federally built National (or Cumberland) Road, which by 1818 reached the Ohio River port
of Wheeling, Virginia (subsequently West Virginia), was ideal for coffles. It was the nation's
first paved highway, with bridges across every creek. Laying out approximately the route of the
future US 40, its broken-stone surface provided a westward overland transportation link that began
at the Potomac River port of Cumberland, Maryland. From Wheeling, the captives could be shipped
by riverboat down to the Mississippi and on to the Deep South's second-largest slave market at
Natchez, or further on to the nation's largest slave market, New Orleans.
I'll stop at the demonstration of how Federal infrastructure improve the slave trade's supply
chain.
From my vantage point (starting with my family history and where I live), the coffle seems like
a work of fiction, a dystopian nightmare written by a demeted sadist. Imagine a hundred or so slaves
chained together and being driven down the main street of my small town by dogs and men with whips.
And now imagine this scene was normal, and kids coming home from school walked right past
it. When do I wake up? (Sure, Rome. But that was
thousands of years ago!)
I focused on the long passage from the Sublette's book because it seemed to me to be an objective
correlative for living in the midst of a slave power, and that experience is an important - a critical
- part of American history, and I believe that getting the history right is important.
And although I've written I prefer
human gift to human rental (wage labor), and human rental to human sale (slavery), I don't have
any grand policy pronouncements to make. I do think we need to be leery of using slavery as a metaphor;
"wage slavery" is not slavery; where's the coffle? Ditto "debt slavery." (That's not to say that
wages and debt are not power relations, because of course they are, but the human reality of the
power relations is different.)
So all I can do is ask you to get the image of the coffle firmly in your mind, and children watching
one go by. The coffle was a thing. That was what was going on. The whole thing makes me want to take
a bath. And we're still living with the complicated and painful consequences of slavery today.
Wage slavery is VERY different from chattel slavery. The danger of ignoring that difference
is that it obscures the intimate connection between the two, which is the legal institution of
private property.
The Roman law of property derived by analogy from conditions of slave ownership. Owning
land is an analog of owning slaves.
David Wayne, October 28, 2015 at 3:06 pm
The thing that stands out to me in this article is the reference that all this is a function
of capitalism. All that we are and all that we know is dictated by the needs of capitalism. We
don't run capitalism, it runs us. So much so that it is impossible to conceive past that little
box you're in to imagine – is this the only way we can live. Born in debt. Live in debt. Die
in debt. The one thing they got right: human slavery is so distasteful we can't do it openly anymore.
But wage slavery is just fine, especially debt peonage. No one can complain if you get yourself
into debt, just if someone else puts you there.
Synoia, October 28, 2015 at 12:27 pm
he had felt it was his patriotic duty as a Virginian
His patriotism was founded on his state, not his country?
a soldier fights for his country-right or wrong-he is not responsible for the political
merits of the course he fights in" and that
Was repudiated at Nuremberg, and enshrined on the concept of "War Crimes." However, the attitude
it suits many in Washington, DC today.
James Levy, October 28, 2015 at 4:04 pm
I hate my job. I am de facto a day laborer, delivering items as and when my boss tells
me to. As a former university professor, this is a hard blow. But to say I and 99.9% of the population
are coffled is pure nonsense. My situation is lousy.
But comparing what the black slaves went through with what I am going through is like saying
the internment camps which held the Japanese-Americans were the same as the death camps in Nazi
Germany. One was bad, the other indescribably worse. Not all evils are identical or commensurate.
Working for a wage is tough, but the number of workers flogged to death, publically whipped,
or who had their thumbs legally broken in thumbscrews last year was pretty low. And the number
of American workers last year who got raises or left one job for a better one was pretty high
in comparison with your average black slave.
So cut the crap about how your job today is "just as bad" as being a slave in pre-1865 America.
I can't tell if you sound more like crybabies or idiots.
Jef, October 28, 2015 at 12:31 pm
Cheap almost free oil effectively gives every american 100 to 1000 slaves. Giving up oil will
be as or more difficult than giving up the slaves back then.
TarheelDem, October 28, 2015 at 4:15 pm
Any adequate reading of the history of the Civil War will show that the 11 Confederate
States destroyed themselves out of lust to extend slavery to the northwestern states. They had
through "compromises" extended slavery to the states south of Missouri already. The threat of
urbanization and immigration creating enough free voters to outvote their 1.6 people gerrymanders
terrified the Southern powers-that-be to the point of pre-emptive war. Read the Secession declarations
of each state; believe them for what they say, not the subsequent reunion-period histories.
The economic benefits of the internal slave breeding industry were matched by the political
benefits; they could try to outbreed the Northern increase through immigration and make profits
off sales to western states.
The financial system relative to international monetary relations was so different in the ante-bellum
period that the creation of Confederate money offered little incentive to punishment. Negotiation
with foreign financial centers disputing the credibility of the money, yes. Would you take currency
from a putative new country that was engaged in a war of secession? But as a causus belli, not
likely.
The attempt to frame the United States with the responsibility for the war was primarily a
post-bellum propaganda effort in support of restoring white supremacy.
Generalfeldmarschall von Hindenburg, October 28, 2015 at 5:47 pm
Yeah- the southern gentlemen were fully aware that even with the stupid 3/5 compromise, they
were going to be on the losing end of a demographic shift if they couldn't expand the slave states.
Hence the weird plots to annex Cuba and take over Mexico.
Oguk, October 28, 2015 at 2:43 pm
I don't know if I posted about this or not, but David Graeber's book (Debt: The first 5000
years) convincingly relates debt directly to slavery, real slavery. Creditors ("masters") rigged
the game, took all their debtors assets, and when there was nothing left for them to take, they
took them, as slaves. Or their wives, daughters, sons. I know, ancient slavery was different in
some respects; slaves could earn their way out or be "redeemed" by a family member or other creditor.
(And there was the Jubilee year – I have to read Michael Hudson on that someday.) I can accept
that American chattel slavery was distinct and diabolical, but it was an intense form of something
that seems to have been with us, humanity, for a long time.
2nd comment is that slave narratives, like Solomon Northrup's or Frederick Douglass's, really
drive the point of this post home. It is a chilling history.
TarheelDem, October 28, 2015 at 7:43 pm
Graeber's book is excellent on the relationship between debt and slavery, a relationship useful
to exploring post-bellum country-store and private debt selling and the debt slavery or working
off debt for third parties. Part of this examination of debt slavery should pay attention to the
way that debt was accounted for and who did the accounting. Company stores in isolated rural areas
were notorious in mining, manufacturing. logging, and agriculture for false books in order to
keep people in debt bondage.
But chattel slavery in America has origin in war raids, not indebtedness, war raids that were
encouraged by the slave traders and in North America involved aboriginal peoples raiding other
aboriginal peoples to provide Amerindian slave for transport from North America to the West Indies
even into the 1700s. That arose aside and independent of English traders trading European goods
on credit for deerskins (in Virginia and Carolina) and slaves. [Alan Gallay, The Indian Slave
Trade: The Rise of the English Empire in the American South, 1670-1717]
The political triangulation of the sweeping frontier balance this slavery, white indentured
servitude, and African chattel slavery as balances of forces to preserve the local aristocracy.
So three forms of servitude co-existed until 1717, two persisted until African chattel slavery
was dramatically profitable in the Tidewater tobacco plantations and Carolina rice and indigo
plantations and internal increase of the plantations caught up with labor demand. And the growth
of the political confederations of the "Five Civilized Tribes" in the mid-1700s shut down the
Indian slave trade. The westward expansion after the War of 1812 and the closure of the overseas
slave trade in 1808 created the conditions for the internal slave breeding industry with its generation
of roving coffles and slave traders, it major slave markets, a good many of which have been preserved,
and its new forms of finance and legal entities. This industry is even visible in census records.
Recording the occupations in the 1850 or 1860 census of slave areas in the Carolinas or Virginia,
one comes upon a patter in the vicinity of major plantation slaveowners. There are scattered settlements
that comprise an overseer, a number of blacksmiths, a waggonmaker, and a wheelwright in close
propinquity in a ratio of about one settlement for ever 150 slaves listed as property of the slaveowner.
The blacksmiths made and maintained the coffles. The wagon technicians made and repaired the planters
fleet for hauling bales or hogsheads. The census lists free men, who rarely are identified as
black or mulatto in these areas, generally not in sensitive occupations, such as blacksmith.
Slave traders are generally listed as "merchant". You have to look from specific ads for slaves
to figure out how extensive their trading business was.
Justicia, October 28, 2015 at 9:44 pm
Yes, Graeber's book is excellent on this point: "Slavery is the ultimate form of being ripped
from one's context, and thus from all social relationships that make one a human being. Another
way to put this is that the slave is, in a very real sense, dead."
Dead, perhaps, to the slave-owner and the laws that protected his property but very much alive
and human to their companions in suffering and to those not blinded by greed, prejudice, propaganda
and social convention.
TarheelDem, October 29, 2015 at 9:16 am
The notion of being dead as far as the law is concerned about his person and his property puts
a very interesting twist on knowing one's "place". And greed, prejudice, propaganda, and social
convention are not as much a primary issue as is the power to plunder and abuse regardless of
the particular motive. It is the institutions that defend the behaviors that hold in being the
attitudes. Rush Limbaugh, the shock jocks, Sheriff Clarke of Milwaukee County, and their like
defend the behaviors of abusive police; that is to let black people know that the law is dead
to them and to "stay in their place". Focusing on the attitude reduces the issue to an individualist
one of "personal responsibility" and the action of one or a few cops instead of a pervasive network
of abusive institutions held in place by a seamless nationwide network of racist propaganda, material
support for abusers, and legal defenses.
Darthbobber, October 28, 2015 at 11:42 pm
Another take on Graeber's book, from the Brit libertarian (no not those libertarians) Marxists
who publish Aufheben. I only agree with a portion of their critique, but its worth a read. http://libcom.org/library/5000-years-or-debt
nobody
About those textbooks… not those in the state of Texas, but those in use in the other states,
Morris Berman's got some interesting insights:
When you think about it, nearly everything in modern American history turns on the Civil
War, because the ideology I have been describing (which can be more accurately described as a
mythology, or grand narrative) requires us to 'fix' traditional societies and eliminate obstacles
to progress. With the Civil War these two goals converged, making it the paradigm case of how
we carry out, or attempt to carry out, these two projects. What the North did to the South is
really the model of what America in general did and does to 'backward' (i.e., traditional) societies,
if it can. You wipe out almost the entire indigenous population of North America; you steal half
of Mexico; you bomb Vietnam 'back to the Stone Age' (in the immortal words of Curtis LeMay); you
'shock and awe' Iraqi civilians, and so on. In what follows, then, I want to look at the War Between
the States in a completely different way than the one found in the typical American history textbook.
This, in fact, is what generated the energy that led to a four-year battle and the death of 625,000
individuals. What follows is an elaboration of this argument.
Let's start with the view of the South as seen from the North. The popular image of the antebellum
South, as it was presented in American history textbooks and classes when I went to high school
in the North, was pretty much the same then as it is now. That is to say, we were taught that
the South, as the home of slavery, was a backward and immoral place, and its refusal to abandon
that institution was the cause of the Civil War. Under the leadership of Abraham Lincoln (pretty
much depicted as a saint), the virtuous Union armies defeated the evil Confederate ones, and the
slaves were finally set free. Mutatis mutandis, this remains the politically correct version,
as well as the liberal academic version, of the war down to the present time.
[However…]
All the evidence suggests that the North's 'nobility' in fighting slavery was a long-after-the-fact
justification, an attempt to portray the conflict as a victory of morality and equality over depravity.
It's a thesis that gets people all worked up, but it finally doesn't wash.
[…]
In reality, the treatment of the South by the North was the template for the way the United
States would come to treat any nation it regarded as an enemy: not merely a scorched earth policy,
but also a 'scorched soul' policy (the destruction of the Native American population was, of course,
a preview of this). From Japan to Iraq, the pattern is the same, to the extant that we have been
able to impose it: first destroy the place physically (in particular, murder huge numbers of civilians,
as the North did to the South during the Civil War-fifty thousand of them by 1865), and then 'Americanize'
it. Humiliation, the destruction of the identity of the defeated party, has always been an important
part of the equation.
[…]
Sure, the war was about slavery; it was hardly a minor issue. But it was part of a much
larger one about two very different and incompatible civilizations, and a fixation on the moral
question of slavery can blind us to the larger (world) context of the Civil War, which was really
the American version of the global modernization process. No, I have no wish to live in a slave
society; I regard it as an abomination. But the South saw a different type of abomination on the
horizon, one that is now with us; and quite frankly, I have no wish to live in that one either.
Bits of chapter 4 from: Why America Filed: The Roots of Imperial Decline
TarheelDem, October 28, 2015 at 7:57 pm
The important point. The United States of America (Lincoln) did not want to fight. The abolitionists
were a minority. The Southern media (newspaper editors) freaked out like to media shock jocks
did over the election of Barack Obama. Unlike this time around, at least so far, the Southern
states were stampeded by their elites into seceding; the state legislatures and governors were
part of those elites. In the midst of the tension Edmund Ruffin, a pro-secessionist rabble-rouser
from Virginia went to Charleston SC, and with the help of military school Citadel and Arsenal
cadets, and SC militia, conducted a coast artillery attack on the closest military installation
– Fort Sumter. And reactions escalated, very much like the diplomatic environment after the the
1914 assassination of Archduke Franz Ferdinand. And they escalated because the Southern hotheads
wanted war.
The area between the two capitals Washington and Richmond was the cockpit of the war. The first
movement was offensive, towards Washington. The Southern planters wanted Lincoln out of there.
JohnnyGL, October 28, 2015 at 3:34 pm
Regarding the coffle, it seems this is early capitalism's answer to the "Trail of Tears" and
the famous "Bataan Death March". Then again, maybe it's not "early" capitalism at all….I'm
thinking of Malaysia and the TPP.
Anarcissie, October 28, 2015 at 4:24 pm
Many years ago I visited a small slavery museum out in the cotton fields somewhere around Memphis
- I forget which side of the river it was on. It was in an old house that might be found anywhere,
but more likely in a suburb than far out in the cotton fields, with no other house in view. Even
the nearest line of trees was hundreds of yards away. In the largest room they had a lot of chains
with large, heavy links, bigger than you would think would be necessary to hold even a very active
human being.
The largest chain had been arranged in a spiral on the floor with the collars around
it, and there was a picture on the wall showing a coffle, the use to which such chains would have
been put. The links of the big chain had a rough, pitted surface, and were a sort of rusty reddish-black.
The elderly White woman in charge told me it had been taken from a long-gone barn or shed not
far away exactly as it was, where it had probably rested since slavery days. In other words, unless
the wind and the rain had washed them off, you could still find the blood and sweat of slaves
on the links. There was some other agricultural gear about, like the hand tools the slaves would
have used.
There was not a lot of signage and no glossy brochures. Pictures on the walls depicted
a plantation house and outbuildings none of which remained, with the exception of the one the
museum was in. I wondered who had put the museum together. When I asked how it had come to be,
the woman only said, 'It's our history. We think people should know about it.'
Felix47, October 28, 2015 at 9:27 pm
Slavery in the US was rather tame and short lived in comparison to the slavery practiced by
the Muslims and Africans themselves. The Somalians enslaved the Bantus etc. etc. The Arabs enslaved
everyone and I recall seeing slaves even in 1991 in Saudi Arabia…..doing the labor since descendents
of Mohammed avoid physical labor if they can since they see it as demeaning. The big difference
was that the Arabs did not seem to see breeding slaves as a business…..they had them castrated
in Africa often before they were imported. It was not until 1960 that slavery was outlawed in
Saudi Arabia although it may well continue to this day. To really understand large scale slavery
we need to go back to the origins of the Muslim movement.
Liz, October 29, 2015 at 6:33 pm
Hi Lambert, the book that first put the scope of the slave trading and breeding industries
into context for me was The World That Made New Orleans by Ned Sublette. It's a fascinating and
terrible account and if I recall correctly, describes some of the slave breeding operations carried
out by Thomas Jefferson.
"... Whatever world order the U.S. may be fighting for in the Middle East, it seems at least an empire or two out of date. Washington refuses to admit to itself that [as a preverse reaction on neoliberalism] the ideas of Islamic fundamentalism resonate with vast numbers of people. ..."
"... No one is predicting a world war or a nuclear war from the mess in Syria. However, like those final days before the Great War, one finds a lot of pieces in play inside a tinderbox. ..."
"... Peter Van Buren blew the whistle on State Department waste and mismanagement during the Iraqi reconstruction in ..."
"... regular he writes about current events at ..."
A once stable region descends into chaos thanks to continuing repercussions from the 2003 Iraq
invasion. (via TomDispatch)
Whatever world order the U.S. may be fighting for in the Middle East, it seems at least an empire
or two out of date. Washington refuses to admit to itself that [as a preverse reaction on
neoliberalism] the ideas of Islamic fundamentalism
resonate with vast numbers of people. At this point, even as U.S. TOW missiles are becoming as ubiquitous
as iPads in the region, American military power can only delay changes, not stop them. Unless a rebalancing
of power that would likely favor some version of Islamic fundamentalism takes hold and creates some
measure of stability in the Middle East, count on one thing: the U.S. will be fighting the sons of
ISIS years from now.
... No one is predicting a world war or a nuclear war from the mess in Syria. However, like those
final days before the Great War, one finds a lot of pieces in play inside a tinderbox.
"... if you look at what is supporting equity prices - how much of that support is coming
from real economic activity versus from using stock buybacks, using cash on balance sheet
for stock buybacks, or mergers and acquisitions, to reduced competition in the marketplace.
These
are the sort of stories that if there were a small increase in interest rates, you would
temper some of that frothiness.
Eliminating the incentive to engage in that kind of activity seems
to me to be a good idea... There would be a proportion of the population that would have
less capital gains - but they've been enjoying very big capital gains, and it is a narrow
segment of the population."
This is how neocolonialism works: "global village' wants to move to "global town", while global
town mercilessly exploits it.
Notable quotes:
"... There is also an important factor: several million Ukrainians work in Russia and in Europe. Comparing,
they see that life in the European Union is more comfortable. And this also affects their geopolitical
preferences . Finally, most of the residents of Ukraine, especially in the center and the west of
the country perceived the reunion of the Crimea with the Russian Federation as an occupation of part
of their country. And in relation to the events in Donbass the propaganda has convinced many people
that it was not a rebellion against the new regime in Kiev, but Russia's aggression. Unfortunately,
revanchist sentiments towards our country in Ukraine can last for a long time. I would even say that
it is impossible to exclude the possibility of war between Russia and Ukraine. At least today it
is bigger than zero. And even 2 years ago this assumption might seem an absurd fantasy. ..."
"... Yes, there are still strong illusions of average Ukrainians in relation to Europe. Many people
think that joining the EU and NATO would quickly help Ukraine improve the living standards of the
population, to solve social problems and so on. Others, more realistically minded Ukrainians, think
like this: yes, we know that Europe will not solve our problems, but we have no other choice. Now,
Russia, if not an enemy, is at least an unfriendly state. And they do not believe in the economic
prospects of the alliance with us. ..."
"... public consciousness in Ukraine is largely irrational. Ive already talked
about the persisting illusions of Ukrainian men from the street. It seems to him that only the West
is able to protect Ukraine from the Russian aggression . This explains such a persistent and irrational
focus on Europe. ..."
"... it seems to me that the real percentage of Ukrainians who
are in favor of strengthening cooperation with Russia on the territories controlled by Kiev is
not much higher than what was revealed by the survey. ..."
Most citizens of "independent" Ukraine are disappointed with Maidan, but they still believe in
Europe
The public consciousness in Ukraine continues to amaze with its irrationality. This is confirmed
by the poll conducted by the International Foundation for Electoral Systems (IFES).
Despite the fact that the majority of Ukrainians acknowledge that Euromaidan did not meet their
expectations, a dominant sentiment in Ukraine is in favor of the pro-Western geopolitical course.
49% of respondents are of the opinion that Ukraine should better strive to deepen relations with
Europe, while the percentage of those who prefer a closer relationship with Russia is only 8%.
At the same time 56% of Ukrainians believe that the country is moving in the wrong direction,
and only 20% hold the opposite opinion. The notion that the country is moving in the wrong direction
is spread across the country and is shared by the majority of citizens in each region.
The survey was conducted on the territory of Ukraine, controlled by the Kiev government, without
regard to the views of some four million people living in the LPR and the DPR.
It would seem that in the last eighteen months Europe has demonstrated that it is in no hurry
to recognize Ukraine as its "own". Western aid is given precisely in those volumes that prevent the
final collapse of Ukraine's statehood. At the same time, due to the influx of Western goods and severance
of economic ties with Russia hundreds of Ukrainian enterprises are closed. The latest news in this
regard: in Ukraine it has become unprofitable to produce even sugar leading to the closing of 15
sugar mills.
The situation in the post-Maidan economy of Ukraine is much worse, however it has not affected
the unrequited love of Ukrainians to the West. Why is this the case and what will be the outcome?
- We must understand that the process of Ukraine's reorientation to the West began long before
the Maidan, - says the Head of the Center for Political Research of the Institute of Economics,
Head of the Department of International Relations of the Diplomatic Academy of the Russian Federation
Boris Shmelev. - For a quarter century that has passed since the collapse of the Soviet Union,
more than one generation of Ukrainians has grown who are convinced that it is necessary not to be
friends with Russia, but with Europe. That only this friendship with the West will ensure the prosperity
of Ukraine.
There is also an important factor: several million Ukrainians work in Russia and in Europe. Comparing,
they see that life in the European Union is more comfortable. And this also affects their "geopolitical
preferences". Finally, most of the residents of Ukraine, especially in the center and the west of
the country perceived the reunion of the Crimea with the Russian Federation as an occupation of part
of their country. And in relation to the events in Donbass the propaganda has convinced many people
that it was not a rebellion against the new regime in Kiev, but Russia's aggression. Unfortunately,
revanchist sentiments towards our country in Ukraine can last for a long time. I would even say that
it is impossible to exclude the possibility of war between Russia and Ukraine. At least today it
is bigger than zero. And even 2 years ago this assumption might seem an absurd fantasy.
"SP": - Why a year and a half since the "February coup" have not convinced Ukrainians that
the EU is not going to make Ukraine a member state and that the West is helping Kiev only to the
extent that the pro-Western regime does not collapse?
- Yes, there are still strong illusions of average Ukrainians in relation to Europe. Many people
think that joining the EU and NATO would quickly help Ukraine improve the living standards of the
population, to solve social problems and so on. Others, more realistically minded Ukrainians, think
like this: yes, we know that Europe will not solve our problems, but we have no other choice. Now,
Russia, if not an enemy, is at least an unfriendly state. And they do not believe in the economic
prospects of the alliance with us.
"SP": - But it is impossible to escape the logic: as long as Ukraine maintained relatively
good relations with Russia, the situation in the Ukrainian economy was more or less tolerable. And
as soon as Kiev finally turned towards the West, the economy began to crumble ...
- All this is true. But public consciousness in Ukraine is largely irrational. I've already talked
about the persisting illusions of Ukrainian men from the street. It seems to him that only the West
is able to protect Ukraine from the "Russian aggression". This explains such a persistent and irrational
focus on Europe.
"SP": - And can we explain such a low percentage of Russian sympathizers by the fact that some
respondents, especially in the South-East of Ukraine are afraid to openly express their opinions?
- Yes, it is possible. Although, it seems to me that the real percentage of Ukrainians who
are in favor of strengthening cooperation with Russia on the territories controlled by Kiev is
not much higher than what was revealed by the survey.
"... This is Naked Capitalism fundraising week. 329 donors have already invested in our efforts to
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check, credit card, debit card, or PayPal. Read about
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what
we've accomplished in the last year , and
our second target , funding for travel to conferences and in connection with original reporting. ..."
"... These companies – according to JPMorgan analysts cited by
Bloomberg – have incurred $119 billion in interest expense over the 12 months through
the second quarter. The most ever. ..."
"... last thing ..."
"... As recently as 2012, companies were refinancing at interest rates that were 0.83 percentage
point cheaper than the rates on the debt they were replacing, JPMorgan analysts said. That gap
narrowed to 0.26 percentage point last year, even without a rise in interest rates, because the
average coupon on newly issued debt increased. ..."
"... "Increasingly alarming" is what Goldman's credit strategists led by Lotfi Karoui called this deterioration
of corporate balance sheets. And it will get worse as yields edge up and as corporate revenues and
earnings sink deeper into the mire of the slowing global economy. ..."
"... But it isn't working anymore. Bloomberg found that since May, shares of companies that have
plowed the most into share buybacks have fallen even further than the S P 500. Wal-Mart is a prime
example. Turns out, once financial engineering fails, all bets are off. Read…
The Chilling Thing Wal-Mart Said about Financial Engineering ..."
"... It spelled out in Micheal Hudson's – Killing the Host. Economics and investment banking
wraps itself in the persona as the engine of growth when, in fact, it is the engine of dis-employment,
stagnate wages, declining manufacturing, inflated property prices which raise the cost of food
production and everything else including forcing a majority to spend more of their income on
debt service leaving less for anything beyond subsistence living. ..."
"... "trillions are wasted and misdirected into useless financial "engineering" as
opposed to real world engineering" ..."
"... I read yesterday that less than 6% of Bank financing is now going to real tangible
assets – the balance goes in various forms to intangible goodwill ..."
"... Tony Soprano called it a "bust up" – take over a business and use the brand to skim the
profits, buy goods and services and roll them out the backdoor and declare BK and then buy it
back for pennies on the dollar. ..."
"... 35 years ago, I spent a day at Ngorongoro Crater in Tanzania with a driver in a rover by
myself watching the Hyenas take down a sick Buffalo culling him out in a gang, working the
animal for hours, as he shuffled along until he fell and ten….. finally ate him in a ferocious
climax. The most fascinating part of the entire trip. ..."
"... Now there is a big fat tax deductible expense, and down the road, "value" is created
when companies are bought for the tax carry forward losses. Win, win win. ..."
"... Is a company that eliminates thousands of jobs via automation or outsourcing worthy of the
public's credit? ..."
This is Naked Capitalism fundraising week. 329 donors have already invested in our efforts to
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Yves here. As anyone who has been in finance know, leverage amplifies gains and losses. Big company
execs, apparently embracing the "IBG/YBG" ("I'll Be Gone, You'll Be Gone") school of management,
apparently believed they could beat the day of reckoning that would come of relying on stock buybacks
to keep EPS rising, regardless of the underlying health of the enterprise. But even in an era of
super-cheap credit, investors expect higher interest rates for more levered businesses, which is
what you get when you keep borrowing to prop up per-share earnings. As Richter explains, the chickens
are starting to come home to roost.
Companies with investment-grade credit ratings – the cream-of-the-crop "high-grade" corporate
borrowers – have gorged on borrowed money at super-low interest rates over the past few years, as
monetary policies put investors into trance. And interest on that mountain of debt, which grew another
4% in the second quarter, is now eating their earnings like never before.
These companies – according to JPMorgan analysts cited by
Bloomberg – have incurred $119 billion in interest expense over the 12 months through
the second quarter. The most ever. With impeccable timing: for S&P 500 companies,
revenues have been in a recession all year, and the last thing companies need
now is higher expenses.
Risks are piling up too: according to Bloomberg, companies' ability pay these interest expenses,
as measured by the interest coverage ratio, dropped to the lowest level since 2009.
Companies also have to refinance that debt when it comes due. If they can't, they'll end up going
through what their beaten-down brethren in the energy and mining sectors are undergoing right now:
reshuffling assets and debts, some of it in bankruptcy court.
But high-grade borrowers can always borrow – as long as they remain "high-grade." And for years,
they were on the gravy train riding toward ever lower interest rates: they could replace old higher-interest
debt with new lower-interest debt. But now the bonanza is ending. Bloomberg:
As recently as 2012, companies were refinancing at interest rates that were 0.83 percentage
point cheaper than the rates on the debt they were replacing, JPMorgan analysts said. That gap
narrowed to 0.26 percentage point last year, even without a rise in interest rates, because the
average coupon on newly issued debt increased.
And the benefits of refinancing at lower rates are dwindling further:
Companies saved a mere 0.21 percentage point in the second quarter on refinancings as investors
demanded average yields of 3.12 percent to own high-grade corporate debt – about half a percentage
point more than the post-crisis low in May 2013.
That was in the second quarter. Since then, conditions have worsened. Moody's Aaa Corporate Bond
Yield index, which tracks the highest-rated borrowers, was at 3.29% in early February. In July last
year, it was even lower for a few moments. So refinancing old debt at these super-low interest rates
was a deal. But last week, the index was over 4%. It currently sits at 3.93%. And the benefits of
refinancing at ever lower yields are disappearing fast.
What's left is a record amount of debt, generating a record amount of interest expense, even at
these still very low yields.
"Increasingly alarming" is what Goldman's credit strategists led by Lotfi Karoui called this deterioration
of corporate balance sheets. And it will get worse as yields edge up and as corporate revenues and
earnings sink deeper into the mire of the slowing global economy.
But these are the cream of the credit crop. At the other end of the spectrum – which the JPMorgan
analysts (probably holding their nose) did not address – are the junk-rated masses of over-indebted
corporate America. For deep-junk CCC-rated borrowers, replacing old debt with new debt has suddenly
gotten to be much more expensive or even impossible, as yields have shot up from the low last June
of around 8% to around 14% these days:
Yields have risen not because of the Fed's policies – ZIRP is still in place – but because investors
are coming out of their trance and are opening their eyes and are finally demanding higher returns
to take on these risks. Even high-grade borrowers are feeling the long-dormant urge by investors
to be once again compensated for risk, at least a tiny bit.
If the global economy slows down further and if revenues and earnings get dragged down with it,
all of which are now part of the scenario, these highly leveraged balance sheets will further pressure
already iffy earnings, and investors will get even colder feet, in a hail of credit down-grades,
and demand even more compensation for taking on these risks. It starts a vicious circle, even
in high-grade debt.
Alas, much of the debt wasn't invested in productive assets that would generate income and make
it easier to service the debt. Instead, companies plowed this money into dizzying amounts of share
repurchases designed to prop up the company's stock and nothing else, and they plowed it into grandiose
mergers and acquisitions, and into other worthy financial engineering projects.
Now the money is gone. The debt remains. And the interest has to be paid. It's the hangover after
a long party. And even Wall Street is starting to fret, according to Bloomberg:
The borrowing has gotten so aggressive that for the first time in about five years, equity
fund managers who said they'd prefer companies use cash flow to improve their balance sheets outnumbered
those who said they'd rather have it returned to shareholders, according to a survey by Bank of
America Merrill Lynch.
But it's still not sinking in. Companies are still announcing share buybacks
with breath-taking amounts, even as revenues and earnings are stuck in a quagmire. They want to prop
up their shares in one last desperate effort. In the past, this sort of financial engineering worked.
Every year since 2007, companies that bought back their own shares aggressively saw their shares
outperform the S&P 500 index.
But it isn't working anymore. Bloomberg found that since May, shares of companies that have
plowed the most into share buybacks have fallen even further than the S&P 500. Wal-Mart is a prime
example. Turns out, once financial engineering fails, all bets are off. Read…
The Chilling Thing Wal-Mart Said about Financial Engineering
Wolf Richter is a San Francisco based executive, entrepreneur, start up specialist,
and author, with extensive international work experience. Originally published at
Wolf Street.
TomDority, October 16, 2015 at 8:01 am
One wonders where all that "investment" goes…pretty much into the CEO's pockets and
investors pockets because banks do not create money by investing in real legitimate capital
formation or producing anything tangible…..i
It spelled out in Micheal Hudson's – Killing the Host. Economics and investment banking
wraps itself in the persona as the engine of growth when, in fact, it is the engine of dis-employment,
stagnate wages, declining manufacturing, inflated property prices which raise the cost of food
production and everything else including forcing a majority to spend more of their income on
debt service leaving less for anything beyond subsistence living.
These trillions are wasted and misdirected into useless financial "engineering" as opposed
to real world engineering….at the expense of a habitable peaceful planet. Soon, I hope, this
dislocation will be corrected. As I have said before, a good start would be to tax that which
is harmful (unearned income and rent seeking) and de-tax that which is helpful – real capital
formation, infrastructure and maintenance of a habitable planet and the absolutely necessary
biodiversity that sustains us.
david, October 16, 2015 at 8:57 am
"trillions are wasted and misdirected into useless financial "engineering" as
opposed to real world engineering"
I read yesterday that less than 6% of Bank financing is now going to real tangible
assets – the balance goes in various forms to intangible goodwill
this is not "useless" from the standpoint of those who direct this game.
Tony Soprano called it a "bust up" – take over a business and use the brand to skim the
profits, buy goods and services and roll them out the backdoor and declare BK and then buy it
back for pennies on the dollar.
the money is used for dividends and buybacks all that money is accumulated by the LBO firms
and management to maneuver the situation / process to the point of the bust up – this time
they are all going simultaneously for the exit even the most high end S&P firm – the HY prices
are deteriorating quickly beyond energy related as % LTV goes higher – before 82′ the LTV of
Fortune Cos. was way below 20% – 35% was considered max –
the same characters / groups will be formed to get to 51% to buy and control the bonds at
20-30% on the dollar in BK and take the assets.
35 years ago, I spent a day at Ngorongoro Crater in Tanzania with a driver in a rover by
myself watching the Hyenas take down a sick Buffalo culling him out in a gang, working the
animal for hours, as he shuffled along until he fell and ten….. finally ate him in a ferocious
climax. The most fascinating part of the entire trip.
USA, USA, USA !
cnchal, October 16, 2015 at 9:38 am
. . .Now the money is gone. The debt remains. And the interest has to be paid,. . .
Now there is a big fat tax deductible expense, and down the road, "value" is created
when companies are bought for the tax carry forward losses. Win, win win.
Just Ice, October 16, 2015 at 10:53 am
"Companies with investment-grade credit ratings …"
With government-subsidized private credit creation, the whole concept of "creditworthiness"
is suspect. Example, is Smith-Wesson "credit-worthy" to many Progressives? Yet, it's their
credit, as part of the public, that would be extended should S&W take out a bank loan.
Is a company that eliminates thousands of jobs via automation or outsourcing worthy of the
public's credit?
This is from Joseph P. Joyce, the author of
The IMF and Global Financial Crises; Phoenix Rising?, which was published last year
by Cambridge University Press. The book examines the evolution of the policies and programs of the
IMF with respect to the global financial markets and crises in these markets:
Among the many surprising features of the global financial crisis of 2008-09 was the emergence
of the International Monetary Fund (IMF) as a leading player in the response to what has become
known as the "Great Recession." The news that the IMF was "back in business" was remarkable in
view of the deterioration of the IMF's reputation after the crises of the late 1990s and the decline
in its lending activities in the succeeding decade. The IMF had been widely blamed for indirectly
contributing to the earlier crises by advocating the premature removal of controls on capital
flows, and then imposing harsh and inappropriate measures on the countries that were forced by
capital outflows to borrow from it. Moreover, the IMF initially had no direct role in dealing
with the crisis. The IMF was relegated to the sidelines as government officials in the advanced
economies coordinated their responses to the crisis.
All this changed in the fall of 2008, however, when the collapse of the financial system led to
an economic contraction that spread outside the original group of crisis countries. World trade
fell and capital flows slowed and in some cases reversed, as nervous banks, firms and investors
sought to reallocate their money to safer venues. In response, the IMF provided loans to a range
of countries, including the Ukraine, Hungary, Iceland, and Pakistan. In addition, the IMF restructured
its lending programs, cutting back on the policy conditions attached to its loans and increasing
the amount of credit a country could obtain. The Fund also introduced a new credit line without
conditions for countries with records of stable policies and strong macroeconomic performance.
Moreover, the IMF pledged to work with national governments and other international organizations
after the crisis receded to continue the economic recovery and improve the regulation of global
financial markets. Consequently, many commentators hailed the rejuvenated IMF as a "phoenix".
The IMF's response to the Great Recession marked a significant break from its policies during
previous global financial crises. These had taken place during an era when the IMF's membership
was stratified by income and whether or not a country borrowed from the Fund. In addition, the
IMF had actively encouraged the deepening and widening of global finance. The IMF's previous responses
to financial crises, therefore, reflected the dominance of its upper-income members as well as
an ideological consensus in favor of financial flows.
The crisis hastened the end of those conditions. The shock to global financial markets and economies
originated in the upper-income countries, and the recovery of many of these nations has been relatively
sluggish. The emerging economies, on the other hand, rebounded from the global economic contraction
more quickly, which in turn contributed to the recovery of the developing nations. Moreover, the
crisis demonstrated that financial instability can be a systemic condition, confirming the need
for prudent oversight and the regulation of financial markets and capital flows.
But while the Great Recession provided the IMF with an opportunity to demonstrate that it has
learned the lessons of its past mistakes, there are fundamental economic and political transformations
underway which will affect the ability of the IMF to counter future financial instability. The
replacement of the dominance of the G7/8 by the G20 should lead to a more equitable governance
structure within the IMF, but inertia has slowed the pace of reform. Moreover, the European debt
crises pose new challenges to the IMF. The Fund is caught in the crossfire among Eurozone governments
and their citizenries over how to deal with insolvent sovereign members. New fiscal challenges
will arise in other advanced economies with aging populations and mounting health care and public
pension costs, and the IMF's response will be scrutinized by its emerging market members who are
concerned about the scale of its lending.
Peter K. said in reply to Min...
The IMF has gotten better, especially compared to the East Asian financial crisis. But, if
they were a force for good they would have advised Greece to go the Argentine route (pace double
D Dan Davies.)
Instead they enabled the devastation of Europe's periphery.
Reply Tuesday, June 25, 2013 at 01:17 PM
Lafayette said...
A TINY SPARK
{The replacement of the dominance of the G7/8 by the G20 should lead to a more equitable governance
structure within the IMF, but inertia has slowed the pace of reform. Moreover, the European debt
crises pose new challenges to the IMF. The Fund is caught in the crossfire among Eurozone governments
and their citizenries over how to deal with insolvent sovereign members.}
There is no evident reason to believe that the G20 will bring any better governance to the
IMF; after all, it is the "bank of last resort" – so to speak.
The fund is indeed in the crossfire, but it should not be thus. The problem of sovereign insolvency
is of a political and not an economic or financial nature. Politicians were borrowing to maintain
the debt, thus building a debt-mountain – for which Tax Revenues provided easily the means to
maintain it. That debt-mountain is still there and still a drag on government revenues precluding
any real Stimulus Spending.
An entire political class (in the EU) did not think for one moment that a Great Recession could
happen until it happened. Now they do, but the lesson has been costly. They should have known
better.
{New fiscal challenges will arise in other advanced economies with aging populations and mounting
health care and public pension costs, and the IMF's response will be scrutinized by its emerging
market members who are concerned about the scale of its lending.}
Frankly, I do not see the IMF coming to the rescue except in the most dire circumstances. There
are many troublesome spots on the horizon that could blow into major proportions. Brazil is one
and I think Russia is another. Most important, though few believe it, is China.
China should look at Brazil for a lesson. Brazil has known some very heady growth, but the
recent violent demonstrations show evidently that not all have benefitted from it and especially
the poorest. I suggest that China is in exactly the same condition; all it needs is a tiny spark
to get it going. And the result will be very bloody indeed.
POST SCRIPTUM
Just think of it ... WalMart might be obliged to Buy American! ;^)
Markets are not stable, efficient, or self-correcting
Economies are not self-correcting.
More than deleveraging, more than a balance sheet crisis: the need for structural transformation
But even as the economy deleverages, there is every reason to believe that it will not return
to full employment.
But the fact that things have often gone badly in the aftermath of a financial crisis doesn't
mean they must go badly.
reforms undertaken so far have only tinkered at the edges.
the crisis has brought home the importance of financial regulation for macroeconomic stability.
But a focus on the provision of credit has neither been at the center of policy discourse nor
of the standard macro-models. We have to shift our focus from money to credit.
Distribution matters as well-distribution among individuals, between households and firms, among
households, and among firms. Traditionally, macroeconomics focused on certain aggregates, such as
the average ratio of leverage to GDP. But that and other verage numbers often don't give a picture
of the vulnerability of the economy. In the case of the financial crisis, such numbers didn't give
us warning signs. Yet it was the fact that a large number of people at the bottom couldn't make their
debt payments that should have tipped us off that something was wrong. Across the board, our models
need to incorporate a greater understanding of heterogeneity and its implications for economic stability.
Should monetary policy focus just on short term interest rates? No!
There has to be coordination across all the issues and among all the instruments that are at our
disposal. There needs to be close coordination between monetary and fiscal policy.
And as daunting as the economic problems we now face are, acknowledging this will allow us to
take advantage of the one big opportunity this period of economic trauma has afforded: namely, the
chance to revolutionize our flawed models, and perhaps even exit from an interminable cycle of crises.
By Philip Arestis Professor and Director of Research at the Cambridge Centre for Economic &
Public Policy and Senior Fellow in the Department of Land Economy at the University of Cambridge,
UK, and Professor of Economics at the University of the Basque Country and Malcolm Sawyer, Professor
of Economics, University of Leeds. Originally published at
Triple Crisis
Has the financial sector become too large, absorbing too many resources, and enhancing instabilities?
A look at the recent evidence on the relationship between the size of the financial sector and growth.
There has been a long history of the idea that a developing financial sector (emphasis on banks
and stock markets) fosters economic growth. Going back to the work of authors such as Schumpeter,
Robinson, and more recently, McKinnon, etc., there have been debates on financial liberalisation
and the related issue of whether what was relevant to financial liberalisation, namely financial
development, "caused" economic development, or whether economic development led to a greater demand
for financial services and thereby financial development.
The general thrust of the empirical evidence collected over a number of decades suggested that
there was indeed a positive relationship between the size and scale of the financial sector (often
measured by the size of the banking system as reflected in ratio of bank deposits to GDP, and the
size of the stock market capitalisation) and the pace of economic growth. Indeed, there have
been discussion on whether the banking sector or the stock market capitalisation is a more influential
factor on economic growth. The empirical evidence drew on time series, cross section, and panel
econometric investigations. To even briefly summarise the empirical evidence on all these aspects
is not possible here. In addition, the question of the direction of causation still remains an unresolved
issue.
The processes of financialisation over the past few decades have involved the growing economic,
political and social importance of the financial sector. In size terms, the financial sector has
generally grown rapidly in most countries, whether viewed in terms of the size of bank deposits,
stock market valuations, or more significantly in the growth of financial products, securitisation,
and derivatives as well as trading volume in them. This growth of the financial sector uses resources,
often of highly trained personnel, and inevitably raises the question of whether those resources
are being put to good use. This is well summarised by Vanguard Group founder John Bogle, who suggests,
"The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year
in IPOs and secondary offerings. What else do we do? We encourage investors to trade about $32 trillion
a year. So the way I calculate it, 99% of what we do in this industry is people trading with one
another, with a gain only to the middleman. It's a waste of resources" (MarketWatch, Aug. 1
2015).
Financial liberalisation and de-regulation were promoted as ways of releasing the power of the
financial sector, promoting development of financial markets and financial deepening. The claims
were often made by the mainstream that financial liberalisation had removed "financial repression"
and stimulated growth. Yet, financial liberalisation in a country often led to banking and financial
crises, many times with devastating effects on employment and living standards. Financial crises
have become much more frequent since the 1970s in comparison with the "golden age" of the 1950s and
1960s. The international financial crisis of 2007/2008 and the subsequent Great Recession were the
recent and spectacular crises (though the scale of previous crises such as the East Asian ones of
1997 should not be overlooked). The larger scale of the financial sector in the industrialised countries
has been accompanied (even before 2007) with somewhat lower growth than hitherto. As the quote above
suggests there has not been an upsurge of savings and investment, and indeed many would suggest that
the processes of financialisation dampen the pressures to invest, particularly in research and development.
Has the financial sector become too large, absorbing too many resources, and enhancing instabilities?
An interesting recent development has been a spate of research papers coming from international
organisations and many others, which have pointed in the direction that indeed the financial sector
in industrialised countries have become too big-at least when viewed in terms of its impact on economic
growth. (See Sawyer, "Financialisation, financial structures, economic performance and employment,"
FESSUD Working Paper Series No. 93, for a broad survey on finance and economic performance.) These
studies rely on econometric (time series) estimation and hence cover the past few decades-which suggests
that their findings are not in any way generated by the financial crisis of 2007/2008 and the Great
Recession that followed.
A Bank of International Settlements study concluded that "the complex real effects of financial
development and come to two important conclusions. First, financial sector size has an inverted U-shaped
effect on productivity growth. That is, there comes a point where further enlargement of the financial
system can reduce real growth. Second, financial sector growth is found to be a drag on productivity
growth." Cournède, Denk,and Hoeller (2015) state that "finance is a vital ingredient for economic
growth, but there can also be too much of it." Sahay, et al. (2015) find a positive relationship
between financial development (as measured by their "comprehensive index") and growth, but "the marginal
returns to growth from further financial development diminish at high levels of financial development―that
is, there is a significant, bell-shaped, relationship between financial development and growth. A
similar non-linear relationship arises for economic stability. The effects of financial development
on growth and stability show that there are tradeoffs, since at some point the costs outweigh the
benefits."
There are many reasons for thinking that the financial sector has become too large. Its growth
in recent decades has not been associated with facilitating savings and encouraging investment. It
has absorbed valuable resources which are largely engaged in the trading in casino-like activities.
The lax systems of regulation have made financial crises more likely. Indeed, and following the international
financial crisis of 2007/2008 and the great recession a number of proposals have been put forward
to avoid similar crises. To this day, nonetheless, the implementation of these proposals is very
slow indeed (see, also, Arestis, "Main and Contributory Causes of the Recent Financial Crisis and
Economic Policy Implications," for more details).
Now that Michael Hudson's Killing the Host has been available for a while, one suspects
a Picketty-like effect with folks "discovering" that Taibbi's Giant Vampire Squid characterization
of Goldman-Sachs (one of many) wasn't funny.
blert, October 9, 2015 at 5:24 pm
It's a squid that squirts RED INK - onto everyone else.
susan the other, October 9, 2015 at 11:03 am
This is a great and readable essay. Sure sounds like Minsky. And even Larry Summers when he
advocates for more bubbles. And Wolfgang Schaeuble said repeatedly that "we are overbanked." We
just don't know how to do it any other way. When everything crashes it's too late to regulate.
Unless Larry knows a clever way to regulate bubbles.
JTMcPhee, October 10, 2015 at 8:40 am
The Banksters' refrain:
"Don't regulate you,
Don't regulate me!
Regulate that guy over behind that tree…"
MY scam is systemically important!
Just Ice, October 10, 2015 at 3:34 pm
"We just don't know how to do it any other way. " STO
Yet there is another way, an equitable way :) Dr. Michael Hudson himself says that industry
should be financed with equity, not debt.
Leonard, October 10, 2015 at 3:53 pm
Susan
There is way to manage bubbles before they get out of control. This article explains how. Go to
wp.me/WQA-1E
ben, October 9, 2015 at 11:17 am
Wasted resources are way higher than the Vanguard example. They misdirect resources especially
into land and issue new money as debt.
RepubAnon, October 10, 2015 at 11:29 pm
They think that they make their living by "ripping the eyes out of the muppets" – so they're
opposed to regulations which would protect the muppets' eyes.
I look at the financial industry as sort of like sugar for the economy – the right amount is
good for you, but too much will kill you.
Just Ice, October 9, 2015 at 12:35 pm
"The lax systems of regulation have made financial crises more likely."
Actually, it's the near unlimited ability of the banks to create deposits ("loans create deposits"
but also debts) that causes large scale financial crises. And what is the source of this absurd
ability of the banks? ans: government privileges including deposit insurance instead of a Postal
Savings Service or equivalent and a fiat (the publics' money) lender of last resort.
Besides, regulations typically do not address the fundamental injustice of government subsidized
banks – extending the publics' credit to private interests.
There is something very wrong about money creation from loans. I'm not arguing that
this is incorrect, I'm looking at money creation being a burden on the citizenry. I cannot see
how this will end well, because of the asymmetric nature, money creation only benefits the banks,
of the burden of money creation.
"There is something very wrong about money creation from loans."
More precisely, there is something very wrong about being driven into debt by government-subsidized
private credit creation. Source of the rat race? Look no further.
It's the bank-money vs. government money situation. The hysteria over "The Deficit (gasp)"
insures that none of us have cash and must borrow to live. The bankers won.
"It's the bank-money vs. government money situation." zapster
More precisely, who gets to create the government's money since it is taxation* that drives
the value of fiat. But it's an absurd situation since obviously the government ALONE should create
fiat, not a central bank for the benefit of banks and other private interests, especially the
wealthy.
As for the private sector, let it create its own money solutions and my bet is that we'll have
a much more equitable (pun intended) society as a result.
The problem then is taxation. How does one tax someone's income in Bitcoins, for example? How
does one preclude tax evasion? Unavoidable taxes such as land taxes (except for a homestead exemption)
are one possibility.
*As well as the need to pay the interest on the debt the government subsidized banking cartel
drives us into.
*Sigh*. The government alone does control the money supply in a fiat currency issuer. The government
hasn't bothered to do so actively because the only time it DID try doing that (under Reagan and
Thatcher) they found out, contra Friedman, that money supply growth bore no relationship to any
macroeconomic variable. Monetarism was a failed experiment.
Scroll down to "The Idea of Interest". This author posits that back in the (ancient, herding)
day, people lent cattle. I lend you my cow, your bull impregnates her, and I get a part of the
calf.
What the author probably didn't understand, but is known to those of us interested in the history
of metallurgy, is that there was a belief that metals 'grew' - after all, plants grew from the
ground, vines grew from the ground, trees and bushes also grew from the ground. It was not a great
stretch to suppose that metals also grew within the ground, and back in those ancient days they
expected the same kind of 'growth' from metals that happened with agricultural products.
Perhaps if I ever get to retire, I can read Hudson's entire work, and possibly he covers this
topic. But I do think that it is time for the rest of us to rethink the nature of money - particularly
in an emerging digital era.
Thanks for that link. Here is a little nugget that relates to today.
The legal limit on interest rates for loans of silver was 20% over much of Dumuzi-gamil's
life, but Marc Van De Mieroop demonstrates how Dumuzi-gamil and other lenders got around such
strictures - they simply charged the legal limit for shorter and shorter term loans!
Curiously, while mathematics during this era was extraordinarily advanced, the government
failed to understand, or at least effectively regulate the close link between time
and money.
Sound familiar. It's more like the banksters regulate government.
As for compound interest, it seems to be the most diabolical human invention yet, as it infers
exponential growth without limits.
Here is Keynes
discussing compound interest in his speech "Economic Possibilities for our Grandchildren" (1930)
From the earliest times of which we have record – back say to two thousand years before
Christ – down to the beginning of the eighteenth century, there was no very great change in
the standard of life of the average man living in the civilized centres of the earth. Ups and
downs certainly. Visitations of plague, famine, and war. Golden intervals. But no progressive,
violent change. Some periods perhaps 50 per cent better than others – at the utmost 100 per
cent better – in the four thousand years which ended (say) in A.D. 1700.
This slow rate of progress, or lack of progress, was due to two reasons – to the remarkable
absence of important technical improvements and to the failure of capital to accumulate.
The absence of important technical inventions between the prehistoric age and comparatively
modern times is truly remarkable. Almost everything which really matters and which the world
possessed at the commencement of the modern age was already known to man at the dawn of history.
Language, fire, the same domestic animals which we have today, wheat, barley, the vine and
the olive, the plough, the wheel, the oar, the sail, leather, linen and cloth, bricks and pots,
gold and silver, copper, tin, and lead – and iron was added to the list before 1000 B.C. –
banking, statecraft, mathematics, astronomy, and religion. There is no record
of when we first possessed these things.
At some epoch before the dawn of history – perhaps even in one of the comfortable intervals
before the last ice age – there must have been an era of progress and invention comparable
to that in which we live today. But through the greater part of recorded history there was
nothing of the kind.
The modern age opened, I think, with the accumulation of capital which began in the
sixteenth century. I believe – for reasons with which I must not encumber the present
argument – that this was initially due to the rise of prices, and the profits to which that
led, which resulted from the treasure of gold and silver which Spain brought from the New World
into the Old. From that time until today the power of accumulation by compound interest,
which seems to have been sleeping for many generations, was reborn and renewed its strength.
And the power of compound interest over two hundred years is such as to stagger the imagination.
Let me give in illustration of this a sum which I have worked out. The value of Great Britain's
foreign investments today is estimated at about £4,000 million. This yields us an income at
the rate of about 6 1/2 per cent. Half of this we bring home and enjoy; the other half, namely,
3 1/2 per cent, we leave to accumulate abroad at compound interest. Something of this sort
has now been going on for about 250 years.
For I trace the beginnings of British foreign investment to the treasure which Drake
stole from Spain in 1580. In that year he returned to England bringing with him the
prodigious spoils of the Golden Hind. Queen Elizabeth was a considerable shareholder in the
syndicate which had financed the expedition. Out of her share she paid off the whole of England's
foreign debt, balanced her budget, and found herself with about £40,000 in hand. This she invested
in the Levant Company – which prospered. Out of the profits of the Levant Company, the East
India Company was founded; and the profits of this great enterprise were the foundation of
England's subsequent foreign investment. Now it happens that £40,000 accumulating at
3 1/2 per cent compound interest approximately corresponds to the actual volume of England's
foreign investments at various dates, and would actually amount today to the total of £4,000
million which I have already quoted as being what our foreign investments now are.
Thus, every £1 which Drake brought home in 1580 has now become £100,000. Such
is the power of compound interest !
From the sixteenth century, with a cumulative crescendo after the eighteenth, the great
age of science and technical inventions began, which since the beginning of the nineteenth
century has been in full flood – coal, steam, electricity, petrol, steel, rubber, cotton, the
chemical industries, automatic machinery and the methods of mass production, wireless, printing,
Newton, Darwin, and Einstein, and thousands of other things and men too famous and familiar
to catalogue.
What is the result? In spite of an enormous growth in the population of the world, which
it has been necessary to equip with houses and machines, the average standard of life in Europe
and the United States has been raised, I think, about fourfold. The growth
of capital has been on a scale which is far beyond a hundred-fold of what
any previous age had known. And from now on we need not expect so great an increase of population.
This reminds me of the huge fortunes growing at compound interest today.
From Wikipedia: It had an endowment of US$42.3 billion as of 24 November 2014.
If this were to grow at a compound interest rate of 7.2% annually, it would double every ten
years, and in one hundred years would be $43 trillion dollars and in two hundred years $44,354
trillion or $44.354 quadrillion. It's as if Bill and Warren are playing a practical joke on the
world, as their compound interest monster swallows every available dollar.
I wonder what a loaf of bread will cost in two hundred years?
Top heavy might be the marginally better angle to take here. Although I recently left the state
(N Texas, Dallas), Texas banks are being merged or acquired left and right. On some occasions
it is necessary if very small institutions are unable to compete, unable to meet a decent ROE
bogey (6.0% ROE is sorta low), or just unable to fend off progress.
Other occasions the larger regional and national banks can just win on scale.
I have long thought about the banking system as a beating heart. Of course it needs fuel, like
the rest of the body, but when a heart gets larger and larger, and contains more and more blood,
and uses more and more fuel, the rest of the body never fares well.
"Surging bank profits" is never a headline that makes me happy.
The real question is: why was it that the "creation of wealth" had to turn
to the financial sector. IMHO it's because the productive sector is lesser and lesser able
to produce surplus value. So that free capital istn't attracted to it. Of course in the financial
sector there isn't any value created at all.
" IMHO it's because the productive sector is lesser and lesser able to produce surplus
value. "
Yes, because of unjust wealth distribution; the host has finally been exhausted. With meta-materials,
nano-technology, genetic engineering, better catalysts, etc. and with practical nuclear fusion
on the horizon (because of new superconducting materials) mankind has probably never been on the
verge of creating so much value as now but can't because of lack of effective demand, not for
junk but for such things as proper medical and dental care while the wealthy have more than they
know what to do with.
Decades of 'political – solvency' insurance has permitted 'the blob' to overwhelm all.
&&&
If all of society played Poker … would anything be produced ? THAT'S the aspect that has
metastasized. It's not proper to term it the 'financial sector' - gambling// speculation emporium…
now you're talking. When the government chronically intervenes to bail out highly sophisticated
fools…. Jon Corzine is the result. - And he's not even the target of law enforcement !!!!
Financial liberalisation and de-regulation were promoted as ways of releasing the power
of the financial sector, promoting development of financial markets and financial deepening.
Above all, it is quite in accordance with the nature of competition between capitalist nation-states.
An important function of a capitalist nation-state is to put its own capitalists in the best possible
position relative to rivals headquartered in rival nation-states. A little less than 70 years ago-within
the lifetime of many people still living-the efforts of the U.S. to curb Germany's competitive threat
to U.S. industry took the form of open shooting warfare that ended with the U.S. invasion and occupation
of Germany. That occupation has never really ended.
... ... ...
This is confirmed in an article by Associated Press writer Michael Biesecker on Sept. 29, who
reveals that Volkswagen's crime is actually a rather common practice in the automobile industry:
"Almost since the passage of the Clean Air Act in 1970, major manufacturers of cars, trucks and heavy
equipment have been busted for using what regulators call 'defeat devices'-typically programing a
vehicle's on-board computer to boost horsepower or fuel mileage by belching out dirtier exhaust than
allowed."
Biesecker reports further, "Complying with clean air regulations can add thousands of dollars
to a vehicle's sticker price while diminishing the driving performance that customers demand." He
quotes Donald Stedman, a University of Denver chemistry professor who specializes in testing the
real-world emissions of cars and trucks: "Every car company has an incentive to do this. Some of
them get caught."
In the light of these facts, as well as the continuing stubborn "secular stagnation" afflicting
the world economy and Germany's remarkable growth in exports, there is more than a little reason
to suspect that the EPA's exposure of Volkswagen emissions cheating and the accompanying
press campaign is motivated by something other than concern about the environment. At the
very least, we should demand that the source code of the software of all automobile manufacturers
be made public immediately!
How Germany is exporting depression conditions to its competitors
In his blog dated July 17, 2015, our fellow economic blogger-and former chairman of the Board
of Governors of the Federal Reserve System-Ben Bernanke complained that Germany has been in effect
exporting mass unemployment and depression. Now, the chairperson of the Board of Governors is one
of the most powerful positions in the world. Nobody who is not closely connected to and enjoys the
confidence of the most powerful U.S. capitalists is seriously considered for the job. So we can assume
that Bernanke's blog posts reflect the views of a considerable section of the U.S. capitalist class.
In a piece entitled "Europe
and Greece: Is Europe holding up its end of the bargain?" Bernanke takes note of the "unevenness
in economic outcomes among countries within the euro zone." (2)
"What is a problem, however," Bernanke explains, is not simply the unevenness of economic outcomes
but that "Germany has effectively chosen to rely on foreign rather than domestic demand to ensure
full employment at home, as shown in its extraordinarily large and persistent trade surplus, currently
almost 7.5 percent of the country's GDP."
Translating from the language of the professional economist, Germany is exporting itself out of
the depression that surrounds it. Instead of generating demand at home, Bernanke complains, Germany
is taking markets away from the capitalists of other countries. "Within a fixed-exchange-rate system
like the euro currency area," Bernanke writes, "such persistent imbalances are unhealthy, reducing
demand and growth in trading partners and generating potentially destabilizing financial flows."
In fact, this is true whether exchange rates are fixed or floating, or as in this case trade is
within a common currency area where there are no exchange rates at all. As we saw last month, global
demand is at any given point in time fixed, which means that the larger the share of the world market
of one capitalist nation the smaller the share of other nations. Only if the market is so robust
that all countries can sell their entire potential product at least at the price of production will
this not be the case.(3)
Under the capitalist mode of production, this rarely happens and it is certainly not the case today.
In addition, for relations between them to be non-antagonistic, participants in the world market
would have to be guaranteed to grow in step with the rising productive capacities of the nations
engaged in capitalist production so they could continue to sell their rising output at their production
prices. Though professional economists, relying on such theories as Say's law, the quantity theory
of money and the so-called
law of comparative advantage, claim this to be true, as I have explained throughout this blog
this is not and cannot be the case under the capitalist mode of production.
According to Bernanke-if you leave Germany out-the unemployment rate in Europe taken as a whole
exceeds 13 percent, based on the usual methods of capitalist governments, which greatly understate
the problem. Therefore, Europe as a whole, excluding Germany, remains bogged down in a chronic depression
and accompanying mass unemployment crisis that shows no signs of ending.
In Germany, however, the official rate of unemployment is below 5 percent. That is even lower
than the "low" unemployment rate reported for the U.S. economy. The point is not that there is really
"full employment" in Germany, but that unemployment is considerably lower there than in most of the
rest of Europe. This is confirmed by the current refugee crisis caused by a combination of U.S.-incited
wars and grim economic conditions throughout North Africa and the Middle East, now further aggravated
by the low price of oil.
... ... ...
Bernanke's complaint against the German industrial capitalists is an old one for Germany's competitors.
In the late 19th and early 20th centuries, Germany was doing exactly the same thing. Pre-World War
I recessions were relatively brief and mild in Germany because Germany was able to export itself
out of them at the expense of its capitalist competitors. Indeed, from the 1880s until the coming
of the "Great War" in August 1914, Germany experienced no major economic crises.
The rapid growth of German industry fueled the growth of the classic German Social Democracy and
made possible the financing of Germany's pioneering "welfare state." This convinced many of the German
Social Democratic and trade union leaders that prosperity, at least for Germany, was permanent. Therefore,
they reasoned, German capitalism would gradually evolve into something that could be called a socialist
society without any major disruptions, not to speak of revolutions. What they didn't reckon with
was the fact that Germany's competitors, which were coming up second best in the economic competition,
were not going to stand idly by while the German capitalists stripped them of more and more of their
markets.
Britain, which had been the strongest industrial power since the industrial revolution of the
late 18th century, was particularly alarmed by Germany's growing industrial power. It responded by
forming alliances with France and czarist Russia in an attempt to contain Germany. The result was
the Great War and the horrors that flowed directly from it, which included
the Great Depression of the 1930s and the rise to power of fascism in Germany. Now it seems that
history is beginning to repeat itself, at least on the economic plane.
"Nobody," Bernanke writes, "is suggesting that the well-known efficiency and quality of German
production are anything other than good things, or that German firms should not strive to compete
in export markets." But you can almost hear Bernanke mumble, but why do the Germans have to be so
much better at producing such high-quality products more cheaply than anybody else, and who won the
last two world wars anyway.
... ... ...
Zetsche's remarks tell us a lot about the relationship of forces in today's imperialist-dominated
world. First, it shows that despite the tremendous progress China has made since the victory of its
great people's revolution of 1949, it remains very much an exploited nation. Foxconn is owned by
Chinese capitalists based not on the mainland ruled by the People's Republic of China-though they
carry out their production there-but rather in Taiwan, a part of China still effectively controlled
by the United States. (4)
This shows that even in the political sense the liberation of China from imperialist dismemberment
is incomplete and won't be complete until Taiwan, and Hong Kong as well, are fully integrated into
the People's Republic of China. The nature of the political social, and economic institutions of
the future fully united China is the business of the Chinese people themselves and not of the imperialists,
or for that matter well-meaning Western leftists who believe they "know" what is best for the Chinese
people. Zetsche's observations should also put to rest claims that today's China is the new imperialist
superpower ready to impose its rule over our planet.
The main theme of this blog is crisis theory, but a secondary theme has been the rise and development
of the U.S. world empire, whose realm-or "reich" in German-has spread throughout the world. This
is the real reich we have to deal with today and not an imaginary reich where Germany won World War
II and the swastika flag flies over the White House. (5)
As we have explained in earlier posts, the American empire has an inner and outer core. The realm-or
reich-of the dollar is the globe. No country, not even Cuba or North Korea, can escape the dollar's
reich. When the Open Market Committee of the U.S. Federal Reserve System meets, all countries hold
their breath. There is also the smaller empire of NATO and its allied institutions such as the U.S.-Japan
Security Agreement and the "special relationship" with Israel.
The U.S. empire is increasingly moving to merge these auxiliary alliances into the structure of
NATO. When I say NATO, I mean unless otherwise noted NATO plus these auxiliary alliances. All NATO
countries, as defined here, are under the effective military control of the United States. While
the governments of these countries are more than puppet governments, they are unable to take major
decisions involving peace and war without the approval of the government of the United States.
A recent example is the decision of the U.S. government to gradually lift the economic blockade
of Iran in exchange for Iran reaffirming its decision not to produce nuclear weapons, accepting restrictions
on its civilian nuclear energy program, and agreeing to inspections. Despite Israel's strong objections
to this agreement, and Netanyahu's direct appeal to the U.S. Congress, the agreement is going ahead.
Another example is the decision of the U.S. to impose sanctions on Russia over the Ukrainian crisis.
Though it is obvious the governments of most of the West European countries, especially the German
government, are not enthusiastic about these sanctions, which hurt their own capitalists, they cannot
override Washington's decision. Within "the NATO reich," these subordinate countries have what amounts
to consultative votes while Washington alone has a decisive vote.
The civilian governments of the NATO countries-again broadly defined-lack full control over their
armed forces and face ouster if they defy the will of the Empire in any matter that the U.S. government
considers vital. This situation has long been the case with many Latin American countries, even before
the rise of the modern NATO. Latin American countries have a long history of military coups that
have ousted many a government that has defied the will of Washington. In more recent years, Washington
has used the coup weapon more sparingly in the face of growing mass resistance to U.S. domination,
but many a Latin American government knows very well that a pro-U.S. military is looking over their
shoulders. This fact limits how far these governments can go in following policies that Washington
does not approve of.
This situation, largely limited to Latin American counties before World War II, now includes all
the NATO countries of both Western and Eastern Europe, Japan, some former Soviet republics, and not
least Germany. The former Soviet Republic of Georgia-Stalin's homeland-and now the Ukraine are de
facto members, though not formally members of NATO. However, NATO does not include Russia, the largest
of the former Soviet Republics, nor does it include the government of the former Soviet republic
of Belarus.
... ... ...
For now, however, the U.S. keeps tight control over the military forces of the other NATO countries,
especially those of Japan and Germany. It is no accident that the main opponents of the U.S. in World
War II are thoroughly networked with U.S. military bases. In addition, thanks to the bravery of Edward
Snowden, we know that Germany is under intense NSA surveillance, including the mobile phone of German
Chancellor Angela Merkel.
Despite their alleged "friendship" and alliance, there is no trust and no true friendship and
there never can be between rival imperialist robber states. However, as long as the military spending
of Germany and other European countries, as well as Japan, remains low relative to U.S. spending,
their capitalists can convert more of their profits into new productive capital than the U.S capitalists
can. This puts the U.S. industrial capitalists at a disadvantage in the struggle for the scarce consumer
dollar.
The U.S., therefore, wants the other imperialist countries-especially Germany and Japan-to convert
some their profits instead into means of destruction. To the extent this happens, the capitalist
development of such dangerous economic competitors as Germany and Japan is slowed down allowing U.S.
corporations to convert more of their profits into means of production, thus improving their competitive
position relative to the Germans and Japanese while the U.S. remains in overall control of the Empire's
military forces. It has the further advantage for the U.S. government that it faces less domestic
opposition to colonial wars to the extent German and Japanese solders do more of the fighting.
The government of Japan has just agreed to revise its U.S.-imposed "peace constitution" to enable
the Japanese government not to fight wars in its own interest against the U.S. but rather fight wars
beside the United States, much like German forces fought under the command of the U.S.-dominated
reich against Yugoslavia in the 1990s and more recently in Afghanistan.
This is a very dangerous development, especially in light of moves by the U.S. to encircle China,
which are all too reminiscent of Britain's attempts to encircle Germany before 1914. We all know
how that turned out.
After World War II, the United States was determined to bring all the imperialist countries under
its military control-first the defeated Axis powers of Germany, Japan and Italy and then increasingly
its "victorious allies," Britain and France, through the NATO alliance.
NATO proper increasingly includes not only the imperialist countries but oppressed countries.
The first such country to be granted formal membership was Turkey, which has special importance because
of its control of the Dardanelles, linking the Black Sea with the Mediterranean Sea. The Empire's
control of the Mediterranean would be seriously undermined if Turkey were to escape clutches of NATO.
Israel,
today's "white colony" of the U.S. and an unofficial NATO member also plays an important role
in the Empire's control of the Mediterranean.
At the end of the Cold War, the newly capitalist oppressed countries of Eastern Europe were signed
up as formal NATO members, violating the meaningless assurances that George H.W. Bush gave to Gorbachev
that NATO would not expand eastward. In fact, NATO has been expanding ever deeper into what was the
Soviet Union. NATO's most recent addition, though so far unofficially, is the grain and natural gas-rich
Ukraine-minus Crimea and so far the Peoples Republics of largely Russian-speaking Donetsk and Lugansk.
This fact is important because Washington and its NATO satellites are not obliged by treaty obligations
to automatically defend the Kiev junta under the doctrine that an attack on one NATO member is an
attack on all NATO members.
If, however, Ukraine becomes an official NATO member, this would not be the case. Fortunately,
there is still time to fight the Kiev's junta's attempt to become an official member of NATO. If
Kiev does achieve this goal, the chances of a shooting war at some point between the United States
and its NATO satellites (including Germany) and Russia would rise considerably.
How NATO works
NATO formally came into existence in 1949, but its real origins can be traced back to the D-Day
of the invasion by the United States and Britain of Nazi Germany-dominated Europe on June 6, 1944.
As the U.S.-British forces advanced eastward across France and into Germany, all of Europe west of
the advancing Soviet army fell under the domination of proto-NATO. However, the growing proto-NATO
empire came to a halt on a line drawn by the Soviet army, which was advancing on Berlin from the
east.
As NATO was formalized after World War II, its members were given a voice in its decision-making,
but it is the U.S. government that ultimately decides. An example of this came in 1990 as the wave
of counterrevolutions swept Eastern Europe and what was soon to be the former Soviet Union. The Socialist
Unity Party (SED) government that had ruled the German Democratic Republic-East Germany-had been
overthrown with the direct assistance of the Gorbachev regime. No realistic observer at the time
had any doubt that the overthrow of the SED would mean the restoration of capitalism in the GDR.
But the question remained, would the German Democratic Republic continue to exist as a third German
state alongside the Federal Republic of Germany-West Germany-and Austria, or would it be merged with
the Federal Republic of Germany in a united Germany-excluding Austria?
France was opposed to the merger of the GDR and the Federal Republic of Germany. It wanted to
keep Germany as weak as possible, both as an economic competitor and a potential military enemy.
But the final decision was Washington's. It decided to give the green light to the merger of the
GDR with the Federal Republic of Germany.
But the U.S. insisted that the new united Germany would have to be a member of NATO. The Warsaw
Pact, the answer of the European socialist countries to NATO, was to be dissolved as NATO was extended.
France had no alternative but to agree-unless it wanted to go to war with Germany and the United
States and with the other NATO countries. And that, of course, was out of the question.
When Washington agreed to the Federal Republic swallowing the German Democratic Republic, Washington
insisted that the Federal Republic in exchange had to drop its demands for the return of its lost
eastern territories, mostly in Poland, that had been part of Germany before World War II.
Indeed, if you look at the map of present-day Germany, you find that its capital, Berlin, is not
more or less in the center of the country like it was before 1914 but in the far east of Germany
almost tucked up against the Polish border. But Poland, just like Germany and France, is now part
of NATO. As long as NATO lasts, this means that if Germany wants to get back the territories it lost
to Poland, it would have to either get Washington's permission or go to war not only with Poland
but with NATO as a whole, including the United States. This, at least, given the current balance
of forces is not feasible. Washington as the master of NATO therefore emerges as Poland's protector
from an economically resurgent but NATO-constrained Germany.
Farther east, a similar situation is emerging. In 1939, as part of the short-lived non-aggression
pact between Nazi Germany and the Soviet Union, the non-Polish territories that Poland had taken
from the Ukraine and Belorussians as a result of the Versailles Treaty and the Soviet-Polish war
of 1920 were to become part of the Ukrainian and Belorussian republics, then part of the Soviet
Union. Today, Warsaw is looking eastward, and we can assume some in Poland would like to get back
Poland's lost territories in Ukraine and Belarus. But as Ukraine is now being integrated into
NATO, Poland will not be able to get these territories unless Washington agrees or Poland is
prepared to go to war with the U.S. and NATO. Just like Poland enjoys Washington's protection
from its fellow NATO member Germany, the Ukraine as a de facto member of NATO in turn "enjoys"
Washington's protection from NATO member Poland
... ... ...
The countries that remain outside of NATO's grasp, including the Russian Federation and the People's
Republic of China, are forced to participate in such Washington-controlled organizations as the World
Trade Organization and the International Monetary Fund. Recently, the non-NATO countries led by the
BRICS (Brazil, Russia, India, China and South Africa) have created parallel organizations to the
International Monetary Fund and the World Bank. However, so far there are no moves to create parallels
to the the U.S. dollar, and above all, there is no move to create a parallel military alliance that
could stand up to NATO. As a result, the BRICS countries are obliged to remain members of the WTO.
All WTO members have to give up key elements of their sovereignty such as what tariff policy they
can follow and, very importantly, their control over patents and copyrights, including software copyrights.
This allows U.S. corporations to sue companies in other countries on the ground that they are violating
intellectual property rights. For example, Apple recently sued the South Korean-based Samsung, claiming
that Samsung smart-phones violated Apple's patents. Not surprisingly, the U.S. federal jury found
in favor of Apple's claims.
When such lawsuits are filed, a U.S. jury-an organ of the state-decides whether or not a foreign
company can or cannot produce a given commodity and how much money the foreign company is obliged
to pay the U.S. company if it is found to be in violation of the U.S. company's "intellectual property."
... ... ...
Countries outside of NATO and its unofficial extensions have considerably more room to resist
the control of their industrial production by the U.S. state. For example, South Korea is very much
a U.S. neo-colony notwithstanding its considerable degree of industrialization. It is in no position
to seriously resist U.S. government control of their production in the profit interests of U.S. corporations.
They are largely forced to defend their interests in U.S. courts, where they are at a considerable
disadvantage.
The People's Republic of China, in contrast, stands outside of NATO. The U.S. press periodically
runs articles complaining that Chinese companies are "counterfeiting" Apple's iPhones and other iThings.
As we know, Apple's "legal products" are also assembled in China, but it seems that this does not
give Chinese capitalists the right to compete with Apple in the spirit of free competition.
These reporters have apparently forgotten their Adam Smith. The great classical Scottish economist
explained that all that keeps the individual capitalist honest and prices anywhere near their "natural
price"-price of production-is the ability of other competing capitalists to manufacture and sell
competing products. This is why Smith advised the government to stay out of the business of telling
individual capitalists what commodities they are not allowed to produce and sell.
What would the old Scottish economist have thought of the concept of "counterfeit products"? He
no doubt would have explained that there is quite a difference between the economic effects of counterfeiting
currency and freely producing commodities of a given use value! If a commodity is "counterfeited"
as a result of free competition, he would have explained, its "value in use" is in no way impaired.
Instead, the profit rates of the capitalists engaged in producing it are reduced to more or less
the average rate. He further explained that this was a very good thing. If paper currency, in contrast,
is freely counterfeited, its "value in use"-to represent money in circulation-is destroyed. That,
of course, is a very bad thing.
Adam Smith's principles are far more respected in the People's Republic China these days than
in the U.S. This shows that capitalism is not yet as outlived in China as it is in the U.S. The U.S.
and the U.S. media take for granted not only the fact that the government can tell the capitalists
what they are and are not allowed to produce and sell but that the U.S. state-and its organs like
U.S. juries-can tell the capitalists of any other country in the world what they are allowed and
not allowed to produce.
In this way, the principle of the national sovereignty of other countries is violated as well
as the basic principles of "perfect liberty," as Adam Smith called free competition. However, even
China as far I know would not allow any of its industrial capitalists to produce and sell a Hackintosh,
not even for domestic consumption on the home market and certainly not for export. The U.S. government-dominated
WTO will not allow Adam Smith-style free enterprise to be fully practiced in the People's Republic
of China-or anywhere else. Free enterprise is the American Way, but super-profits are what the game
is all about.
The unique evils of the Third Reich
More than 70 years have passed since Adolf Hitler committed suicide in a Berlin bunker to avoid
capture by the Soviet forces fighting their way into central Berlin, or what was left of it. Two
generations of imperialist propaganda have mystified the reality of the Third Reich. Nowadays, the
policy of Hitler's government of killing every Jewish man, women and child has been emphasized at
the expense of all the other features of the Third Reich. Worse, it is done in a way to justify the
establishment of apartheid Israel.
As a result, younger people who are finding out that the imperialists lie about practically everything
may suspect that they are lying about Nazi Germany to justify Israel's crimes against the Palestinian
people. There is, however, no doubt whatsoever that Hitler's policy of killing every Jewish man,
women, child, and baby is a crime unique in history-"Jewish" defined in terms of race and not religious
belief. Atheist and Christian "Jews" were defined as "racial" Jews by the laws of the Third Reich.
This crime must never be forgotten or trivialized by making false analogies.
The U.S. government and media are guilty of constantly trivializing the crimes of the Third Reich-which
included not only those against Jewish people-whenever U.S. imperialism attacks an independent country
and its leader is equated to Hitler. Young people who are taught relatively little about European
history and are learning to distrust with good reason the history they are taught are encouraged
to draw the conclusion that perhaps Adolf Hitler was not really that bad. Perhaps, they think, Hitler's
only real crime was that he opposed the drive to world domination by the United States in the interest
of his country, much like was the case with Yugoslav President Slobodan Milošević, Iraqi President
Saddam Hussein, Libyan leader Colonel Muammar Gaddafi, or Syrian President Bashar al-Assad today.
Particularly outrageous is the growing tendency of Anglo-American professors of history to group
Hitler with China's Mao Zedong as examples of the most evil dictators in world history. (9)
These professors, "historians," and journalists should be called to order by all who care about the
truth of what really happened in the 20th century. Such comparisons are, of course, deeply offensive
to the people of China. You would think the leaders of Jewish organizations would feel the same way.
But unfortunately the official leaders of the Jewish world are so committed to Zionism and defending
the crimes of the state of Israel against the Palestinian people that they allow these outrageous
comparisons between Mao and Hitler to pass as though it was the most natural thing in the world.
Bad as were the crimes of the Third Reich against the Jewish people, the Roma people-the so-called
"gypsies"-homosexuals, and people with disabilities, they form only a part of its crimes. A central
feature of fascism in general and German fascism-so-called National Socialism-in particular-is its
hostility to all forms of organization of the working class. The Nazis were determined to
destroy all forms of "Marxism." In Nazi terminology, this referred to both Social Democrats and "Bolshevism"-the
Communist movement. They even abolished the anti-Marxist Catholic trade union movement.
It is easy to see why this aspect of the Third Reich is played down or more often ignored altogether
nowadays. Unlike the case during the Cold War, the media largely ignores the trade union movement
today. And when they do mention it, they treat it as a marginal remnant of the past with no future.
Yet those who have studied the real history of the Third Reich know that before Jews were being thrown
into concentration camps, not to speak of death camps, Communists to be followed by Social Democrats
and trade union leaders were. Only after the workers' movement was smashed in Germany were
the Jews and other victims rounded up and murdered in the death camps.
For this reason, I will examine the Third Reich and the circumstances both economic and political
that led to its rise and fall. In what ways did Hitler's German empire resemble the other imperialist
empires of Britain, France, Belgium and the present U.S. global empire and in what ways was it truly
unique?
Of special interest is the role the Third Reich played in the rise of the present-day reich-the
U.S. world empire.
_______
1 Volkswagen was founded in Nazi Germany by the Nazis in 1937. In a future post that will examine
the nature of Nazi Germany, I will examine how and why this company came into being. The main problem
with Volkswagen today, however, is not that it was founded by Nazis who are now long dead, but rather
that it is a profit-driven corporation whose aim is to make a super-profit above and beyond the average
rate of profit, just as all the other capitalist automobile companies are.
(back)
2 Lenin stressed in his pamphlet "Imperialism" that uneven development is one of the most important
characteristics of capitalism. It is interesting to see the former chairman of the U.S. Federal Reserve
System-and our fellow blogger, the Republican Ben Bernanke-confirming Lenin on this point.
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3 The price of production, or production price for short, is the price that enables capitalists
to realize the average rate of profit on their-or its, in the case of a corporation-total advanced
capital.
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4 Taiwan was a part of China for centuries but was seized by Japan in 1895. The population of
the island is overwhelmingly Han Chinese. It was returned to China in 1945 as a result of Japan's
defeat in World War II. In 1949, the KMT-founded as a bourgeois nationalist party by China's first
president, Sun Yat-sen-and headed by Chiang Kai-shek after Sun's death-were driven off the mainland
and withdrew to Taiwan. There they continued to rule under U.S. protection as the "Republic of China."
During the Cold War, the U.S. media referred to the Chiang regime as "free China" or "nationalist
China," while the People's Republic of China was referred to as "Red China." Chiang's regime continued
to "represent" China in the U.N. until 1971. In the early 1970s, as the first steps toward normalized
relations between the People's Republic of China and the United States were underway, the U.S. media
dropped the term "Red China" and began to refer to China by its proper name the "People's Republic
of China" or simply "mainland China"-or when they want to induce a feeling of hostility to China
as "Communist China." The term "Red China" is no longer used.
The term "free China" or "nationalist China" has also disappeared from the U.S. media to be replaced
by "Taiwan," which is treated as a separate country, though the government on Taiwan still calls
itself the "Republic of China." The U.S. has encouraged the growth of a "pro-independence" party
on Taiwan that claims that Taiwan is a separate country. The People's Republic of China insists that
Taiwan is very much a part of China-a position also supported by the KMT.
The People's Republic of China hopes that peaceful reunification will occur in the future. However,
it reserves the right to use force if peaceful means to bring about the reunification of China fail.
Beijing's policy has since the days of Mao Zedong been to wait until China's rising military power
obliges the U.S. to recognize in practice that Taiwan is indeed a part of China. At that point, Beijing
hopes that a peaceful reunification of Taiwan with the rest of China will occur.
The U.S. for its part does not actually say it will and is not obliged by any treaty to defend
Taiwan's "independence" in the event of armed conflict with the People's Republic of China. But it
has hinted it might go to war to defend the "independence" of Taiwan. This is a brazen violation
of China's right to self-determination and is one of the ways, though not the only one, that a shooting
war could erupt between China and the U.S.
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5 Would a victory by Nazi Germany have resulted in the swastika flag of the Third Reich flying
over the White House? A victory by the Nazis might well have occurred if bourgeois forces socially
and politically analogous to those represented by Mikhail Gorbachev and Boris Yeltsin had taken over
the USSR not in the 1980s, as occurred in real history, but rather in the 1930s and 1940s. I will
examine this interesting question in the coming post that will examine the economics and politics
of the Third Reich.
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6 An example of the growing instability of the dollar system is the current global economic slowdown-including
the failure of U.S. industrial production to increase this year for the first time since the end
of the Great Recession, despite strong auto sales and a recovering residential housing market. The
immediate cause of this slowdown is the U.S. Federal Reserve Board's decision to end "quantitative
easing." The Federal Reserve knows that if it resumes the quantitative easing policy, sooner or later
a run on the dollar will occur that would put into question the continued rule of the "dollar reich"
over the international monetary system and with it the "NATO reich" that the dollar reich finances.
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7 The danger that a local war can be transformed into a general war through alliances is illustrated
by the events of 1914. The war began as a local war between Austria and Serbia. Germany came to the
aid of its ally Austria. Russia then declared war on Germany and invaded Germany-with disastrous
results for Russia-in an attempt to help its ally Serbia. Republican France then declared war on
Germany in a move to protect its ally czarist Russia. And Britain then declared war on Germany in
order to defend its allies Belgium, France and Russia.
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8 U.S. liberals-not to be confused with economic liberals-distinguish themselves from conservatives
by advocating a larger role for government in the economy. U.S. conservatives, in contrast, are supposed
to want to hold government intervention in the economy to a minimum.
But not all government intervention in a capitalist economy is progressive. Outlawing Hackintosh's
in the interest of preserving Apple's super-profits is an example of a thoroughly reactionary form
of state intervention. State intervention under capitalism can be progressive if it enables the productive
forces to develop or at least be sustained. Similarly, state intervention that limits the workday,
for example, is also progressive. But it can't be said that intervention by government is good in
and of itself anymore than it can be said that it is always bad in and of itself. It all depends
on the concrete circumstances.
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9 Just to name one these differences, Hitler fought a war of conquest against most of the other
European nations, leading to the death of tens of millions of people. Mao fought a war for the liberation
and unification of China. Perhaps only a professor who is a resident of a country whose territory
has not been invaded by a foreign power for centuries can overlook this "tiny" difference between
Hitler and Mao. There are many other differences as well, but this is not the place to list them
since if I did I would have to write a large volume and not a footnote.
