2 Resolutions

Rob Johnson of the Roosevelt Institute and others have put together a call for people to get their money out of the big banks and into smaller banks and credit unions. This is a good idea. Using data provided by Chris Whalen of Institutional Risk Analytics you can find a good solid small bank or credit union near you, it's a way to vote with your money. They also put together a nice little video using "It's a Wonderful Life," recommend watching.

It reminded me of the '92 presidential primary. In the debate right before Christmas, we tried to get Jerry Brown to ask people what America was becoming. Did they want to live in Bedford Falls or Pottersville? Jerry however balked. He was never much for cultural references, though he's the only American politician of the last four decades to have a propensity to quote Mao, and at the same time keep a tough law and order image. While Mao might not get you much, being tough on law and order hasn't hurt anyone running for office in America over the last four decades. One of the reasons California is in the mess it's in is because the prison industry's been one of our largest growth sectors over that time.

That debate did have highlight, when Tom Brokaw tried to stop candidate Brown from giving his 800 number. Jerry responded by saying, "You can't censor a presidential candidate." And then proceeded to list how much money NBC's parent company, General Electric, had given in elections over the past couple cycles. HO, HO, HO! "That's just not cricket, old man," you could feel Mr. Brokaw wanting to cry out in his affected half-patrician. No Tom, it's not even Marquess of Queensberry. We raised a lot of money that night. It will take a very long time for the United States to recover from having the majority of our broadcast media controlled by three corporations for a half-century.

OK, I digress. The second resolution is for us all to start becoming citizens again. To gather together every other week with five or six others and talk about the issues impacting our lives. We need to relearn the skills and art of being a citizen, developing a political dialog with each other is the first step.


Happiest New Year, let's hope it's good one, without any fear.

peace

deflation

As the financial markets, particularly the bond boys, hype up the concern about inflation, it certainly seems from global manufacturing numbers we remain fairly entrenched in a deflationary environment. The FT has a piece about Japan stating:

The Japanese government on Wednesday unveiled an ambitious economic growth plan, pledging to create millions of new jobs and achieve average growth of 2 per cent over the next decade.

This is an interesting point on several levels, most importantly the FT calling 2% growth "ambitious." But as the FT points out, "Japan has not seen gross domestic product growth of 2 per cent since the 1980s."

In American history there have been two previous deflationary periods, the 1870s to 1890s and then the 1930s. Globally, the most recent deflationary period has been the Japanese economy, which began with the popping of the Japanese financial bubble in the early 1990s and the Japanese have failed to extract themselves to this point. Much of the US reaction to the popping of our financial bubble has been very much what the Japanese did and as we can see this failed to bring substantive growth.

The deflationary periods of the past and Japan's more recent quandary are not completely analogous. I believe there's deeper currents running here, particularly in Japan's case, what happens when you have what might be called a mature industrial economy, simply you cannot achieve growth rates obtainable in going from an agrarian to industrial economy. This means, as Bill Greider points out in his excellent book Come Home America, you simply cannot rely on growth to meet many economic and political challenges. This changes how you must address these challenges. Doing so will require a great rethinking of political economy. Make no mistake, a stagnant or low growth American economy will instigate tremendous political changes.

on fraud

Yves Smith has an excellent piece on some of the financial shenanigans, that is fraud, that occurred to bring about the financial crisis. It's a little technical for the financial unwashed, but I think anyone who reads it can get the basic idea. Particularly in this case, Goldman's selling of what they knew were worthless bonds and then on the backside covering with AIG the losses for when it was found this paper was worthless.

The term "predatory" in business concerns a company that treats its customers as prey, that is it does not serve their interest, but simply is looking to gain the greatest profit in whatever way possible. The top of our financial system is predatory to the rest of the economy, they serve little interest but their own, and at this point provide little or more appropriately negative value to the rest of the economy, that is to you and me. An essential read.

Oakland Libraries

In the counties touching the San Francisco Bay, there's close to ten million people these days. The namesake popular city is well known, however with only seven-hundred thousand people, it should really be considered only a neighborhood of the larger Bay Area metropolis. Directly across the Bay from San Francisco is Oakland, which in many ways is the mirror image of her more popular sister. It's not quite as big, four-hundred thousand people and of course racially, the population of Oakland is 35% black, while San Francisco is less than 8% black, leading to the stunning other side of the track(bridge) figure, per capita income is $35,000 in San Francisco and just under $22,000 thousand in Oakland. That's almost a 40% difference.

I put these facts out there in regards to a piece in the SF Chron this morning. Oakland has shut their libraries due to lack of money. State and municipal budgets are being slammed hard in this economy and those at the bottom of the economic ladder are paying the heaviest price. It's important to keep this in mind when you consider all the money the Fed and Treasury have funneled to Wall Street, compared to the relatively little that's flowed to the rest of the economy. Trickle down economics, that is, getting pissed on, remain firmly entrenched.

It's also important to remember average wages have basically been stagnant for three decades in the country and that as things stand, it's fairly certain the step down many have taken in the last two years, will not be met with a corresponding future step back, much more a step up from where they were, unless we do some serious rethinking on how this economy runs. Oakland's closed libraries are sad commentary on the state of the union in 2009.

Where the Wild Things Were

When I was twelve, I ordered a series of Time/Life books. They arrived once a month and were about different animals -- lions first, then elephants, tigers etc. They were great hardcover books, and being pre-internet and even pre-cable, offered some excellent photos and education on these animals. However, every book ended in the same grim fashion, these animals were endangered, many on the verge of extinction. A deep enduring education for a twelve-year old, who from this developed his first political inklings, which were conservative, or more accurately, radical conservationist. Almost forty years later, things for the great, and many of the small beasts of this planet have not gotten much better. Conservation remains the oldest and most radical environmental politics, and for a planet fast approaching 7 billion people, setting aside room for others is the least priority.

The modern environmental movement sprung out of the the late 19th century's conservation movement. It started as movement to conserve what was left of the American wild, which even a hundred years ago, wasn't much, and morphed into an understanding that preserving the environment was also about preserving the species homo sapiens. The book, Where the Wild Things Were, is a an excellent addition to the growing understanding of the importance of conservation and human well being. The book's theme concerns the last decades discoveries on the importance of large predators to their larger ecological systems. Killer whales, lions, wolves, and others play important and surprising roles in keeping greater diversity and health in the systems they inhabit.

For example, killer whales, still reeling from the human decimation of whale populations, changed their prey, and started eating stellar seals and sea otters. One whale can eat a lot of seals and otters. Decimating otter populations, the whales in turn allowed an explosion of urchins, the otters main food source, and the urchins devoured kelp forests, greatly reducing diversity and populations of many other species. The extinction of wolves in the Yellowstone system led to the destruction of riparian habitats, particularly aspens and cottonwoods, as elk, no longer fearing ambush around rivers and streams,lingered to feast on the new shoots, thinning growth along the stream and river beds.

Where the Wild Things Were is filled with a number of these fascinating stories and of course just like my old Time/Life books doesn't have much of a happy ending. There's been a few success stories, which certainly offer optimism for the future, if we can change our habits, and restore some large enough areas. But overall, the story of complete destruction continues and has now spread to the once infinite oceans. The last decades decimation of shark populations is turning our oceans into seas of goo and slime, jellyfish populations are exploding.

The real lesson of Where the Wild Things Were is an understanding that we have very limited knowledge of complex systems, and the global environment is a very complex system. Stability in complex systems is bought about with diversity. When systems become less diverse they are prone to cataclysmic swings. We can look at the financial system with our monolithic too big to fail systems, which failed systemically and catastrophically last fall, yet we've done nothing to diversify. Our systems thinking is to say the least insufficient and overwhelming tends to our historical cultural bias that through centralization comes stability, which may be true for a short time, but centralized system always collapse grandly.

It gets even more alarming when we think of our modern agriculture practices creating vast mono-cultures out of once vibrant and diverse ecological systems. Despite the assurances of Dow, Monsanto, and ADM, just like the previous assurance of our Wall Street giants about their innovations spreading risk, these centralized systems are inherently unstable. We still have a lot to learn from this old earth. We have little understanding to the degree we humans have changed this planet, which in the long course of biological history has been accomplished in nothing more than an instant. Nature however is the strictest of teachers, her lessons come with no mercy.

ben's bet

FT has a good piece with Chinese premier Wen Jiabao on the value of the renminbi, and as those concerned about global currencies say, "When Mr. Wen talks, people listen."-- Ho, Ho Ho. Mr. Wen states plainly that calls for appreciating the value of the yuan only "purpose is to hold back China’s development."

Now, we saw Professor Bernanke on the front of Time magazine taking George Washington's place on the dollar, people think he has a lot of control. Mr. Bernanke's policies have devalued the dollar and outside of global financial markets, the one great beneficiary are the Chinese. As FT states,

China dropped its formal dollar peg in 2005 and has since allowed the renminbi to trade within a narrow band. But since the middle of last year it has operated a de facto peg. This has meant that the renminbi has depreciated about 9 per cent against the currencies of its main trading partners since early this year, even though the Chinese economy has rebounded quicker than any other major economy.

Phew, "de facto," I'll say. Now Professor Bernanke stated in the book he wrote on the Depression, currency devaluation had helped improve the situation. However, pre-monetarist thought and those who created the IMF considered the early 1930s beggar thy neighbor policies of currency devaluation having added globally to the deflationary environment. The Chinese have an advantage over a lot of manufacturers from this devaluation for sure. Ben's policy is causing problems in global manufacturing, people are reacting louder. I guess this is when Ben comes out and says as he wrote, what will really help is a coordinated global currencies devaluation, though first he and Mr. Geithner will have to quit claiming they're for a strong dollar. We'll see how that goes.

Mr. Bernanke's unprecedented money policies implications are far from done playing out, any sharp waves in a very untethered global currency market would cause massive shifts.

subpoenas

Yves Smith has an important piece about Goldman and AIG. She points to another good piece by Spitzer, Partnoy, and Black -- all fluent in finance -- in the NYT calling for AIG and Goldman to unload their communications of the past few years. How is it Goldman had so much "coverage" exclusively with AIG? AIG after all is now a public company. And well even if they weren't, we need to get the info if we're going to be able to understand what happened, and how are we suppose to start fixing things, if we don't know what happened?

A few people with a little guts can do a lot right now, like subpoena a whole bunch of people involved in the financial industry over the last few years, and the last couple decades. Have them put their right hand in the air and their left on something they hold sacred, like their fortunes, and start explaining how things went down. Now a lot of the problems with the financial system were perfectly legal, and we need to change that, but there was a ton of fraud, and we have to understand that too.

On Money - II

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. This process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. -- J.M. Keynes, The Economic Consequences of the Peace

The most interesting fact about money is it is the most unreal component of all economies. Unless money is based on some commodity, it has no intrinsic value. And if that commodity is gold, it has very little intrinsic value, though it is shiny. Economies, whether they're capitalist, socialist, agrarian, merchant, or industrial utilize money. It is never a neutral agent, but must necessarily be a stable one. An historical example of how important stability is to currency is Isaac Newton. The definer of one of the most stable forces in the universe, gravity, Newton also served as warden of the Royal Mint, where in 1717 he established a link between gold and the pound that would survive for over two hundred years -- that is till the end of the British empire.

Money may best be thought of, to paraphrase Keynes in his Treatise on Money, as both a medium of exchange and a little more esoterically though no less essentially, as a storer of value. Keynes states the creation and defining of money is a natural responsibility of government, "The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing(money) which corresponds to the name(money)..." However Keynes adds the kicker, "...and to vary declaration from time to time—when, that is to say, it claims the right to re-edit the dictionary." Meaning simply, the state creates and defines money, though reserves the right at times to redefine the meaning.

Across history, governments have at many times re-edited the monetary dictionary to both redefine and revalue money. The most recent and cataclysmic re-editing of the money dictionary came in the 1930s. This re-editing occurred across the globe, where prevailing gold standards were thrown-out and currencies devalued in an effort to both inflate national economies and gain global competitive advantage. There was in short a definitional crisis of money.

In half dozen years, almost all countries abandoned the monetary gold standard. Those who jumped first gained advantage. Some countries such as New Zealand and Denmark, at the time still predominately commodity economies, engaged in competitive devaluation known as the "Butter Wars" in order to gain advantage in the British butter market. As the devaluations continued, the world basically split into different trading blocks; the British and their empire, the French and assorted European nations, the Japanese and their growing Asian empire, and two of the largest national economies, the US and Germany basically on their own.

As Jeffry Friedan writes in his book Global Capitalism about Britain:

Trade with the rest of the world fell precipitously, but exports to the sterling area—the empire, the Nordic and Baltic countries, Argentina, and a few others—rose from 50-60 percent of Britian's exports.

Germany to the world's chagrin was probably the greatest loser in the beggar-thy-neighbor devaluations and tariffs. Adam Tooze points out in his excellent book, The Wages of Destruction, in 1934, "German export volumes remained 40 percent below their level in 1932(and) was one of the principal causes of unemployment both in industry and commerce."

It would take another dozen years and a World War to completely "re-edit" the monetary dictionary. The new global officialdom instituted the International Monetary Fund to act as official global currency editor. As the IMF states:

During the Great Depression of the 1930s, countries attempted to shore up their failing economies by sharply raising barriers to foreign trade, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to hold foreign exchange. These attempts proved to be self-defeating. World trade declined sharply, and employment and living standards plummeted in many countries.

This breakdown in international monetary cooperation led the IMF's founders to plan an institution charged with overseeing the international monetary system.

The IMF created the new global currency standard, which was the dollar tied to gold. This redefinition lasted twenty-five years, when the gold standard was dropped and the dollar in and of itself became the global currency standard. Today, how one defines or values the dollar or other currencies is a open question. One might say, in respect to Mr. Keynes, currency is no longer a dictionary definition, but a Wiki. Today, currency is defined by Treasuries, Central Banks, and large corporate interests in global markets. As the great market propagandist himself Milton Friedman wrote in his 1992 Money Mischief, the contemporary global currency situation has "no historical precedent....It has entered a new and urgent stage as the world ventures into hitherto unexplored terrain."

Now, the great historical tradition that has been shattered in the last several decades is the idea of fixed currency rates. Instead, the idea of flexible current rates, or more accurately, currency values defined by markets, has become dominant in this new era of laissez faire. In support of this "market valuing," events of the past have been reinterpreted, particularly the currency turmoil of the 1930s. Time Man of the Year and Fed Chairman Bernanke is in the forefront of this school and has enacted a policy of dollar devaluation based upon it.

If you've in any way managed to follow this ludicrously glib history of 20th century money, I'd like to re-emphasize several points:

1. Money has no intrinsic value.
2. Times when the value of money is in question, that is it is being redefined, are inherently unstable.
3. While, Mr. Friedman was right the global currency regime is somewhat unprecedented, history still has lessons to teach. The greatest of which is Mr. Bernanke's monetary policy, "Ben's Bet" of dollar devaluation is not only adding instability, but fraught with great risk.

The Education of Howard Dean

Howard Dean was on Good Morning America calling the most recent Senate health care bill, "the collapse of health care reform in the United States." Now, I don't draw attention to this to talk about health care, which was doomed from the start. I instead ask you to watch this interview for what it says about politics in America in year 2009. Our politics are broken.

Doctor Dean's understanding of the problem has grown immensely since 2004, and everyone should listen carefully to what he says. We have a system completely controlled by entrenched-interests and they don't simply have influence on any issue, such as health care, banking, or the environment, they define it. Just as importantly watch the arguments Mr. Stephanopoulis uses against Dr. Dean, it exudes the insolvency of our politics. Even better is so-called "progressive" Tom Harkin's argument that Democrats need to be for the bill because all 40 Republicans were against it. Ho-Ho-Ho. Gee Tom, where was such sublimely simplistic thinking in 2002 when you voted for President Bush's occupation of Iraq?

I was in the District of Corruption last week. A person I respect took me to a meeting of progressives/liberals trying to decide about taking on a incumbent Democrat in the primary. I learned quickly there were a lot of labor people there, which made me nervous, because these days a lot of labor people gathering pretty much equates with defeat, as they remain completely bought into a system that rolls them at every opportunity. Most interesting was a young articulate fellow who gave just an extraordinary synopsis of the health care process in DC, showing a completely broken system. But what was really extraordinary, almost everyone attending completely ignored what he said and went on acting like they just needed to elect someone else.

So, that's where we are. We can continue to delude ourselves the system works, or we can come to terms that unless we have real reform, DC is going to simply codify our decline for the profit of a few. We need to change our government for the 21st century. You can continue believing in tooth-fairies, Santa Claus, and Obamas, or you can start believing in each other.

On Money - I

Last year, we had a panic of the global financial elite. Instead of their proponents assurances of stabilizing the financial system, securitization and derivatives sped the downward spiral. Simply, they failed. The downward spiral has been slowed by the Federal Reserve and Treasury stepping in to unprecedentedly backstop the enormous debt-load created over the past couple decades and reflating equity prices. So, far from getting back soon to any kind of normal, we're on a much longer path to some new financial destination.

The Fed was created at the beginning of last century in an attempt, one that proved lacking during both financial crashes of the 1920s, to bring stability to a financial system prone to catastrophic collapse. Over the course of the late 19th century, bankers such as JP Morgan would step in during such panics and provide "liquidity," that is short-term infusion of money to get the system through the panic. However, the 1907 panic revealed the financial system too large for even Mr. Morgan to insure, so the Fed was created.

Providing liquidity in panics was one of the Fed's main reasons to exist. In this most recent panic, the Fed's slashing of interest rates and other measures to provide "liquidity" were completely in its jurisdiction. However, the Fed and Treasury took many unprecedented moves providing more than "liquidity," they attempted to massively shore-up solvency. An easy difference to understand a "liquidity" problem and a solvency crisis is that with liquidity problems a little money lent over a short period can get you back on track. Insolvency means it doesn't matter how much time and money I give you, you're not going to be financially viable, if at all, without taking significant losses.

There's been various measures the Fed and Treasury have taken to try and provide solvency including the Fed's balance sheet, government agencies stepping into buy loads of bad paper, and what may be most important, simply allowing the banks not to account their losses. That is simply pretending, but today Bloomberg(tx mish) has an important article stating,

"Banks will need to take “substantial” writedowns on home-equity loans to enable loan modifications that will allow the U.S. housing market to recover, according to Amherst Securities Group LP."

So, despite all efforts by the Fed and Treasury, the banking system remains insolvent, held together by a boatload of government money and a continued officially sanctioned belief that future growth will eventually make all the bad numbers good. But the banks understand their financial predicament and this is why they refuse to lend money.

The "financial innovation" of the last three decades failed spectacularly. You'd be hard pressed to figure that out listening to anything out of New York and DC. The idea that securitization and derivatives made finance more stable was proved spectacularly wrong. The only person close to any officialdom saying this is Paul Volcker, who yesterday in the WSJ stated,

I hear about these wonderful innovations in the financial markets, and they sure as hell need a lot of innovation. I can tell you of two—credit-default swaps and collateralized debt obligations—which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of?...Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.

Not only did "financial innovation" not add a shred of growth, it made the financial system more unstable than it's been for seventy-years. The financial innovations and the Fed and Treasury's responses have made the system more unstable, specifically in two ways. First, it has greatly distorted the pricing mechanisms across the economy. It is very difficult from housing, to energy, to commodities, and currencies to understand if prices have any correlation to the "real economy" -- the financial system is broken.

Secondly and more importantly, the Fed and Treasury created not a new bubble, but a surrealistic version of the last one in which global currency markets are now in the middle. The instability of the global currency system has risen to a point not seen since the 1930s.

Next: The Dali Currency Bubble

the circus comes to town

Good Morning Aztlan
-- Los Lobos

Our political financial circus grows. In the center ring yesterday was the Maestro himself, Alan Greenspan or as NBC titles him "Doctor" Alan Greenspan -- Hey Ho! But best of this well rehearsed clown act, sitting next to Mr. Greenspan was none other than MSNBC's own Jim "Mad Money" Cramer. Mr. Cramer looked appropriately in awe, and why shouldn't he, there the apprentice sits next to the Maestro of bullshit. Mr. Greenspan delivered the act's punchline:

People think stock prices are just paper profits. They are not. They create real purchasing power and, most importantly, they create a fluidity into the financial system which is the reason why even though banks are not lending freely at this particular stage, they are solvent and the problems that we had six to nine months ago have disappeared, because essentially $5 trillion worth of increased equity is pouring into the economy.

This is called bubble blowing Fed style. I underestimated back in March how much the Fed could goose the stock market. I was not sufficiently dazzled by the tricks the Maestro had demonstrated when he was Chairman. The Maestro claims the Fed inflated stock pop has created $5 trillion worth of "equity," bubble equity to be exact. And then with a wave of his wand Doctor Maestro claims the banks are solvent, which if you don't have to account losses I guess they are. All and all a bravo performance

Over in the left ring, the President dons a Teddy Roosevelt costume and claims he did not, "run for office to be helping out a bunch of fat cat bankers on Wall Street." Phew, one has to ask if he is including Larry and Rahm? Remember, before his most recent stint in "public service," Mr. Summers received $5.2 million in one year from a hedge fund. Rahm of course in between his stint as the Clintons' bag-man, and make no mistake that was a lot of heavy lifting, and his election as Congressman cleared $16 million in couple months as an investment banker in Chicago, as they say in Chicago, "Good work, if you can get it." And what do you get if you were the main rain-maker for Rahm's investment banking career? You're appointed Chairman of the newly government owned General Motors.

If you want a not so funny but entertaining view of the Democrats and fat-cat bankers, try Matt Taibbi's excellent piece in Rolling Stone. For the circus' next act, let's subpoena Bob Rubin and Mr. Bill and ask about the creation of Citi, that might not only be entertaining, but useful.

financial reform

This is why events unnerve me
They find it all a different story
Notice whom for wheels are turning
Turn again and turn towards this time
-- Ceremony

First question, why would anyone listen to anything these people say?

How do you know this bill is pretty much complete garbage, because you don't hear Wall Street wailing it's the end of capitalism. In fact, the only thing Wall Street complains about, Jamie Dimon in the Wall Street Journal, is about the Consumer Financial Protection Agency, which is sop for liberals/progressives, whatever they call themselves these days. The banks fought back, with plenty of votes to spare, mandatory mortgage modifications, the one immediate thing that would actually help people. The Fed audit made it in, but no doubt will meet its demise in the Senate, that after all is what the Senate is for.

We need radical financial reform. That is radical in the original Latin, "to the root." It needs to start with the notion that the so-called "financial innovation" of the last decades is tripe, simply Wall Street taxes on the rest of us. The large banks need to be broken into a thousand pieces and we should do some serious looking into how state and local governments can fund necessary projects without going to the banks. Of course, all of this is completely off the radar screen of a DC controlled by the financial sector. The only way we will get meaningful financial reform is to first have meaningful political/government reform, that's where we are.

the economic weather

A report called Battered by the Storm, put together and released by several organizations documents the vast number of people being crushed by our economic problems. Our corporate media doesn't give much time to reporting the devastation occurring at the bottom rungs of our economy's ladder. Blacks, Hispanics, women, children, and less-educated white males have felt the full force of the crash. This report documents that rising stock prices in no way correlate with any sort of broader economic health. It also should be noted by our cultural warriors of the last decades, cultural liberalism is always tied to economic vitality, without the latter, the former struggles mightily.

Meanwhile, in our global economy, our Ministry of Financial Propaganda, that is the corporate media, blared headlines all over that China's exports improve. The AP states, "The trade figures for November were the best in a year with exports falling just 1.2 percent from the same month of 2008." Remember, global trade numbers were off a cliff last fall, so a further 1.2% decline is an interesting improvement. There are growing problems with over-capacity in China. The WSJ had a good piece on the steel industry stating, "Crude steel output touched records this year, with the latest monthly posting in October reaching the second highest in history at 51.75 million tons, up 42% compared with a year earlier." Now China currently produces half of all global steel, so if its exports are down 1.2%, while its production is up 42%, things are not right.

Paul Volcker continued his campaign in the financial wilderness against financial innovation. The former Fed chair once again stating the obvious that, "credit default swaps and collateralised debt obligations had taken the economy 'right to the brink of disaster' and then added that most uncomfortable fact, the economy had grown at 'greater rates of speed' during the 1960s without such products." Volcker concluded, "The industry's 'single most important' contribution in the last 25 years has been automatic telling machines, which he said had at least proved 'useful'. Who knew Volcker had a sense of humor? All financial reform thinking needs to begin with innovation in the financial industry over the last three decades has been of little value to the economy, but great profit for Wall Street.

Finally, a very unpalatable Paul Krugman gives up Keynes' ghost in the NYT stating in so many words, "We're all monetarists now." Mr Krugman meet Mr. Eccles, Fed Chairman 1935 who stated, "We are in the depths of a depression and... beyond creating an easy money situation through reduction of discount rates, there is very little, if anything, that the reserve organization can do to bring about recovery." However, Mr. Eccles never won a Nobel Prize.

jobs and the insolvency of industrial economics

In the last twenty years an increasing percentage of our people have come to depend on industry for their livelihood, so that today the wage-workers in industry rank in importance side by side with the tillers of the soil. As a people we cannot afford to let any group of citizens or any individual citizen live or labor under conditions which are injurious to the common welfare...We must protect the crushable elements at the base of our present industrial structure.

We stand for a living wage. Wages are subnormal if they fail to provide a living for those who devote their time and energy to industrial occupations. The monetary equivalent of a living wage varies according to local conditions, but must include enough to secure the elements of a normal standard of living--a standard high enough to make morality possible, to provide for education and recreation, to care for immature members of the family, to maintain the family during periods of sickness, and to permit a reasonable saving for old age.

Hours are excessive if they fail to afford the worker sufficient time to recuperate and return to his work thoroughly refreshed. We hold that the night labor of women and children is abnormal and should be prohibited; we hold that the employment of women over forty-eight hours per week is abnormal and should be prohibited. We hold that the seven-day working week is abnormal, and we hold that one day of rest in seven should be provided by law. We hold that the continuous industries, operating twenty-four hours out of twenty-four, are abnormal, and where, because of public necessity or for technical reasons (such as molten metal), the twenty-four hours must be divided into two shifts of twelve hours or three shifts of eight, they should by law be divided into three of eight. -- Theodore Roosevelt, 1912

Several decades ago, when I first went into electoral politics, I learned a lot from an old Democratic organizer. He used to say, "There's three planks to any Democratic campaign platform: Jobs, Jobs, and Jobs." That Democratic party is a long time gone, replaced first by a massive capitulation to Reaganomics and then under the "leadership" of Robert Rubin and Bill Clinton with a party completely captured by the interests of Wall Street. So, it's amusing to watch present leadership fumble around trying to reclaim a little of the party's old economic philosophy in a desperate attempt to avoid a drubbing next November based on three issues: Jobs, Jobs, and Jobs.

The Democrats have several big problems with jobs. First, becoming the party of Wall Street, they lost fiscal fortitude -- they're weak on defending government spending . This is most obvious in the pronouncements of President Obama, who can't mention more spending without at the same time talking about cutting the deficit. It's getting schizophrenic. Secondly, even if the Democrats were to take the advise of Mr. Krugman, and spend as much as they like, it would be insufficient to get the economy moving at a time when the financial system remains broken, and the Congress shows great inability to do anything about it.

However, a third point is the most relevant. The social construct that is the job is increasingly insufficient to meet the political economy challenges of the 21st century. I started this post with some thoughts from a Teddy Roosevelt campaign speech to give a little historical perspective. Today's social economic norms like the 40 hour work week, the 8 hour day, living wages etc were developed over decades. The industrialization of America created an entirely new political economy vastly different from the agrarian/merchant political economy that dominated the Republic's first hundred years. In fact, the job itself is an industrial era construct.

We are at the birth of a new era. As we are discovering this transformation is as wrenching as the move from agrarian society to industrial society was a century ago. Presently, we remain firmly entrenched in the thinking of industrial political economy. For example in the last four decades as Wall Street and our mega-corporations chased cheaper wages and wrongly closed and then shipped American industrial jobs across the globe, we marketized other segments of society to create replacement jobs, we created a massive "service" sector. Today, we don't need to create more service sector jobs, in fact, we should get rid of many we have, starting with the financial sector.

We need a new political economy, one based on the realities of the 21st century. One that understands evolution of technology, for example automating industry, makes the number of new jobs in even repatriated industries limited. Global resource constraints make it impossible for the other 95% of humanity to lead the over-consumptive lives of contemporary Americans. All sorts of environmental problems caused by industrial economics quest for infinite growth are severely impacting basic life systems necessary not simply for industrial society, but civilization as we know it.

We will not meet these challenges clinging to the beliefs, constructs, and power structures of industrial political economy. We can start by reevaluating the job, and we can start there by cutting the work week. It can be better.

The Non-poitical Fed

Mr. Bernanke crying this Sunday in the pages of the Post about not making the Fed political let loose today on getting rid of Social Security and Medicare(tx calculated risk):

"It's only mandatory until Congress says it's not mandatory. And we have no option but to address those costs at some point or else we will have an unsustainable situation," said Bernanke.

"Willie Sutton robbed banks because that's where the money is, as he put it," Bernanke said. "The money in this case is in entitlements."

That anyone listens to Professor Bernanke about anything at this point is extraordinary, that the President has asked him to be reappointed and the Senate is following shows for all to see the insolvency of our politics.

Quantum Economics

The great extension of our experience in recent years has brought light to the insufficiency of our simple mechanical conceptions and, as a consequence, has shaken the foundation on which the customary interpretation of observation was based.
-- Niels Bohr

One of the great problems today in trying to understand what is with the economy is many numbers are at best suspect. Two and half decades of bubblenomics has done severe damage to our tools of observation. Of course this is good for speculation, but bad for making decisions about the "real economy." This is the whole point of bubblenomics, it profits speculation at the expense of the real economy.

Now, "market value" has no underlying objective value. In fact if you go back to the classical economists, market value is derived from scarcity. However, in his General Theory of Employment, Interest, and Money, Keynes compared market value, specifically stocks in this case with a beauty contest:

“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

In a sense all market value is subjective, one might say relative and filled with uncertainty. Such is reality so the early 20th physicists taught us. Such subjective valuing, if structured properly, can add a certain democratic element to the physical processes of production and consumption. Government has an important role to play in this process two ways. First, it can provide certain objective values, values we deem to be civilization.

Secondly, the government needs to calibrate the weights and measures by which we choose the prettiest faces. Over the past two decades of bubblenomics, the government's role of calibrating weights and measures was severely weakened. More importantly, its reactions in the last year to the market's increasing instability has only made the existing weights and measures less valuable. The money the Fed has poured into the markets has in fact made them increasingly worthless measures. For example, Amazon is back to dot.com valuation of almost 100 P/E. Historically, 15 P/E is considered sustainable. With the relaxing of accounting standards, or more appropriately the official sanction of "Enron Accounting"(see Nomi Prins excellent piece - tx ys) no one can judge the value of the banking sector.

God may not play dice with the universe, but the global financial system is a massive crap game with loaded dice.

Bernanke, the Fed, DC, and Politics

Chris Whalen has an excellent piece on Institutional Risk Analytics against reappointing Bernanke. They put something up on banking every week and I'd recommend reading. However, unless I'm greatly misreading things, Bernanke's reappointment is a done deal. The vast majority of Congresspeople can't tell you what the Fed does and on such matters of ignorance, the Congress is always a locked vote for the status quo -- that is what got them there. On such matters of grand ignorance, it takes great fear to move DC, look at the Iraq and Afghanistan occupations for example.

Remember the good Doctor's keen insight about "fear and loathing" as two main motivators of American politics, especially for the political class. While DC is getting a little nervous about double-digit unemployment and their public kowtowing to Wall Street, the banks, and the mega-corporations, they ain't nearly nervous enough to stand-up to money's lobbyists. After all, what would they say to them? Everything most of them have ever said about Wall Street or banking came straight-out of the lobbyists' mouths. Not only would any particular Congressperson have to break that barrier of fear, but if they did, then would come that embarrassing moment of hemming and hawing emptiness, when the lobbyist retorted, "Well, then what are going to do?"

Of course ignorance of the Fed, Wall Street, and banking is a national affliction. We, the people, haven't much of a clue either. The only way we're going to really get change is if people begin talking about these issues, not in DC, but in the Congresspeople's districts. We need a new political economy coalition -- I wrote more about this here. For lack of a better imagination, I believe next November's elections offer an opportunity to begin piecing this coalition together. It starts by getting the American people to talk about these issues. In the American system, the citizenry must step-up and demand change. Let the electeds hear discontent at home, that's what will really get them nervous. Replacing a number of Congresspeople in the next election will get things moving.

a new political economy coalition

The economic crisis of the past year and half reveals there is no coalition for economic reform in the United States. The great urgency facing American politics is can a coalition for reform be cobbled together. The last major political economy coalition was forged in the New Deal era. That coalition lays in tatters and the contemporary political landscape offers no ability to revive the New Deal coalition. We must begin anew.

In creating a new political economy coalition, it would serve us well to understand what helped the political collapse of the New Deal coalition. In part, the New Deal coalition was ripped asunder by the cultural revolution of the 1960s, which was birthed out of the Civil Rights Movement. The Civil Rights Movement is wrongly equated with the rest of the cultural movements of the 1960s. In fact, it was their mother. When the bottom of society moves, and disenfranchised southern blacks were the bottom of society, simple political physics necessitates everything on top moves too.

Many of the people and ideas which helped create the free-speech, anti-war, women's movement and others, received their political training and their understanding of political freedom from working and watching SNCC and the broader Civil Rights Movement. However, there were some great differences between the parent and offspring.

Most importantly, the Civil Rights Movement was comprised of the country's poorest demographic, while most of the cultural movements birthed from it, were led and made-up of the wealthiest generation in world history. While the Civil Rights Movement worked for the removal of Jim Crow and full democratic enfranchisement as very hard defined goals, much, certainly not all, of the cultural movements of the 60s were less defined, the goals more a moving target.

The Civil Rights Movement and the 1960's cultural movements redefined American politics. The New Deal economic coalition, previously forged three decades before in the Depression, splintered apart and the cultural issues of the 60s gradually redefined the country's party politics. From the bottom the black underclass standing up combined with the ferment of a massive cultural revolution from the top creating a threatened white working/middle class, who in the 70s began to feel the economic impact of globalization, deindustrialization, and rising oil prices.

At the same time, the new medium television, very centrally controlled, was firmly entrenched as the great societal arbitrator. Television not only delivered the cultural revolution into America's homes, reinforcing the views of many that cultural change was being imposed from the top, but it also ran roughshod over and destroyed old political associations. The politics of television redefined American politics, broadcast television is not a democratic medium.

From this environment grew a tremendous not only sense but a reality of disenfranchisement for a significant segment of the white working/middle class. This disenfranchisement had racial, cultural, economic and political elements mixed together in a volatile brew that had one commonality, a yearning to keep things how they were.

Reaching deep into this disenfranchisement, the Conservative movement would gain ascendancy. In ways openly reactionary to the Civil Rights Movement and much of the 60's cultural change, the conservatives held together a diverse coalition that was electorally successful, but less effective in holding back racial, cultural, and most importantly economic change. Conservative rule was most successful in further centralizing control of the nation's economy, leading to the complete dominance of mega-corporations, growing income inequality, and destruction of public culture in the promotion of privatization. Beneath all this continued a rotting of democratic political institutions, culture, and practices.

Today, the Conservative coalition is in shambles, much the same way the New Deal coalition fell apart in the 70s. However, we now have an economy with completely unfettered corporate control, a bi-partisan political class in complete subservience, and political disenfranchisement at an unprecedented level. If we are to meet the challenges in front of us, the opportunity presents itself to create a new economic coalition using the revival and evolving of the American political system as both the main cause and the main means.

In order to do this, we need to place in the forefront issues of political economy. We are going to have to look at ourselves as equals not in our differences, but in our commonality. We are going to have to redefine ourselves not in what makes us unique, but what as homo sapiens make us common in the necessities and qualities of political economy in the 21st century. Most importantly, we must understand dividing along established political boundaries will only insure a continuation of the political economy status quo. We must follow the paths of the founding of this republic and its greatest most recent manifestation, the Civil Rights Movement -- power in our society is too concentrated, we've come to take our rightful share.

30,000 More Troops isn't a Exit Strategy

Foxhole with surreal lighting. Manic, frantic soldier machine guns into darkness at
repeating, haunting, taunting distance voice:
Hey GI, fuck you!
Fuck you GI!

Captain Willard, "Who is the commanding office here?"
Exasperated machine gunning soldier turns quizzically asking, "Ain't you?"
-- Apocalypse Now

Bubblenomics

A couple interesting things about the Dubai financial situation. First, true feudal lords can talk with even greater indignant arrogance than our Lords of Wall Street. Sheikh Mohammed bin Rashid Al Maktoum stated about the coverage on Dubai, “They do not understand anything!” Even more interesting, what is this form of capitalism Dubai is practicing? The Shiekh made clear, “This company is independent of the government." Hmm, he certainly didn't learn that from the United States, certainly not from Mr. Bernanke, or Paulson, Geithner and Summers.

Even more novel was Dubai's finance minister's suggestion the “Creditors need to take part of the responsibility for their decision to lend to the companies." What the hell sort of capitalism is that? The FT reminds such talk will get you immediately ostracized by the bond markets, where in era of securitization and assorted derivative products there are no bad investments. There is no risk, you remember "risk was spread," that is, to you and me, even if it's palm shaped mega-housing developments atop enormous landfills in the Arabian Gulf.

The Dubai case is both the continuing deflating of the old bubble and a harbinger of the bubble trouble spreading to global currency markets and begs what will come of that. Europe is loaded with problems from East Europe, to Greece, to Ireland, and yes Morgan Stanley warns(tx yves s.) of UK default. Most interesting is that great global conglomerate Citi has hired Willem Buiter. His last piece warns of the brewing sovereign debt crisis, "We may well see in the next few years the first sovereign default by an old EU15 country since Germany defaulted on its debt in 1948."More interesting was Buiter's mid-summer rumination that what was needed was a "debt jubilee." There's no global institution this could be better started with than Citi, no doubt plenty of raw material with which to work.

We need to shrink the global financial industry, it is astronomically out of whack. The man most responsible for transferring the American financial bubble to the global currency markets is Ben Bernanke. Forget about his claim as Depression expert, what he really learned from Mr. Greenspan was upon a bubble popping, you can't reflate the old bubble, you need to blow up a bigger one. Nassam Talib appropriately laments the Professor's reappointment:

What I am seeing and hearing on the news -- the reappointment of Bernanke -- is too hard for me to bear. I cannot believe that we, in the 21st century, can accept living in such a society. I am not blaming Bernanke (he doesn't even know he doesn't understand how things work or that the tools he uses are not empirical); it is the Senators appointing him who are totally irresponsible -- as if we promoted every doctor who caused malpractice.

Another of your Senator's votes to keep in mind next November.

Tell Your Senator No On Bernanke

From Yves Smith:

Ben Bernanke’s confirmation hearing before the Senate Banking Committee for his reappointment as Fed chairman is scheduled for this Thursday.

When CEOs preside over disasters, they are fired. Captains go down with their ships.

And Bernanke needs to be replaced.

He was a major architect of the policies that created the crisis.

He ignored signs of the severity of the developing crisis and failed to prepare for obvious dangers, like the collapse of an investment bank.

He has turned the Fed into an off-balance sheet funding vehicle of the Treasury to circumvent constitutionally-mandated budgetary procedures.

He has fought all efforts to examine the central bank’s conduct in the rescue operation.

Before, during, and after the crisis, he has put the interests of banks ahead of those of ordinary citizens.

He needs to go. Tell your Senator that this vote matters to you and he needs to vote no on Bernanke. Enlist the support of like-minded colleagues and friends to deliver the same message. Keep it simple and to the point. Bernanke has failed at his job. The US public deserves and needs better.

Please sign http://StopBailoutBen.com/

Be certain to concentrate your calls and e-mail messages on the members of the Senate Banking Committee, who are:

Christopher J. Dodd Chairman (D-CT)

Tim Johnson (D-SD)

Jack Reed (D-RI)

Charles E. Schumer (D-NY)

Evan Bayh (D-IN)

Robert Menendez (D-NJ)

Daniel K. Akaka (D-HI)

Sherrod Brown (D-OH)

Jon Tester (D-MT)

Herb Kohl (D-WI)

Mark Warner (D-VA)

Jeff Merkley (D-OR)

Michael Bennet (D-CO)

Richard C. Shelby Ranking Member (R-AL)

Robert F. Bennett (R-UT)

Jim Bunning (R-KY)

Mike Crapo (R-ID)

Bob Corker (R-TN)

Jim DeMint (R-SC)

David Vitter (R-LA)

Mike Johanns (R-NE)

Kay Bailey Hutchison (R-TX)

Judd Gregg (R-NH)