"Markets poised to punish Spain"

Well it's the lay of the land, my son.

The FT warns Spain today as the currency crisis gathers steam. The first paragraph states:

Miguel Angel Fernández Ordóñez, governor of the Bank of Spain, needed only one sentence to summarise the daunting scale of the challenges facing his country. “Unfortunately,” he told a conference last week, “we find ourselves at a historic moment.”

Ain't that the truth. Those who romanticize history too often forget the very heavy lifting involved in epics of change, and for a modern world addicted to convenience, there's the matter of simple fitness in rising to the challenge. The first matter at hand is to begin taking off the blinders and destructing the myths which have led us to down a path that has come to an end. Unfortunately, it doesn't look like the FT will be of much help here.

The first myth we need to destruct is the one called "markets", particularly when it is used in relation to the financial system. Some might feel a little indignant that those who created the whole mess, the "financial markets" are now calling the tune for the supposed solutions. Let's understand, the "financial markets" are an extremely small group of institutions. Five giant corporations control the majority of the US banking system, add a few more players, such as Goldman, the Fed, and a handful of institutions in Europe and Asia, and you pretty much have the aristocracy of finance the FT and the WSJ like to call "the financial markets."

Let's remember, in the past two years, the system these institutions created failed at every level, and the only reason any of them exist today is because the massive infusion of your tax dollars that continues to flow into their coffers. So when they tell the little people of Europe and across the globe that's its time for them to live within their means, there really is only one response, "Bullshit!"

Nonetheless, our financial overlords are in full blown hypocritical arrogance. The FT states:

The bad news for Mr Zapatero and other deficit-burdened European prime ministers is that the markets, impersonal yet fickle, do not give a damn about paradoxes or who was to blame yesterday for a problem today.

Yes indeed, the same institutions who over the past couple decades couldn't create enough garbage debt, now want it to be made good. The FT itself, not above editorializing in its stories states:

Spain must, for its own sake and that of the eurozone, implement the measures announced with unwavering determination – and make them even tougher if the recession lasts longer than expected.

At some point, we're going to have conclude the path we've been on for the past couple decades has ended. We have to dethrone our financial overlords and the way to begin doing that is destructing the debt to which they have us chained. Of course, that's only the first step. It also means each of us are going to have to change how we do things. We can do that and still live better, but not the way we do now. Then In the future, people can gratefully romanticize our unfortunate historic times.

Robert Rubin

Robert Rubin is going to be in front of the Financial Commission next week. What can be said? Mr. Rubin has done more damage to this republic than pretty much anyone of the past three decades, and that includes Reagan, both Bush, Greenspan, the Clintons, Rumsfeld and Cheney. He should be on trial, charges: looting of the public purse and treason. Yet instead, he sits upon stacks of money he changed the laws to acquire while holding public office, and his spawn infest our republic's institutions.. Watch Mr. Rubin and keep in mind there's plenty of people serving five to ten for pushing over a gas station or market, Mr. Rubins heist, in the trillions and counting.

Yves Smith, whose important book Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, comes out this week--review soon--puts forth a few of the charges on the long list of Rubin indictments:


Rubin to be Grilled by Financial Crisis Inquiry Commission
Yves Smith

Bloomberg reports that former Treasury Secretary and Citigroup board member Robert Rubin will be summoned before the Financial Crisis Inquiry Commission in April, with Alan Greenspan and Chuck Prince likely to be tapped as well.

On the one hand, it’s a welcome sign that the FCIC will be interviewing many of the major figures responsible for the crisis. On the other, the Q&A format is almost certain to prove mighty unsatisfying. Although Angelides has been more effective a questioner than expected, none of the committee members is a litigator (as in practiced in dealing with witnesses in public forums) and it shows. Imagine what these hearings would be like if David Boies, who was devastatingly effective in the Microsoft antitrust trial, had a go at the likes of Bob Rubin, who bears far more responsibility for the crisis than most realize.

Greenspan, while a key actor, is unlikely to provide new information. He has been grilled repeatedly over his record; he has defended it verbally and in print; he therefore has already been subjected to every major line of attack and has practiced responses. Prince never seemed up to the task of managing Citi; a year into his tenure, he was having difficulty asserting control over the sprawling bank.

But Rubin was either the architect or the moving force behind so many of the flawed policies and practices that fed the crisis that it is difficult to come up with a complete list. For starters, he was an advocate of a finance-centric view of the economy and ultimately of US interests (notice how often trade negotiations have made opening financial markets a priority item. It’s due to the near certainty that American firms would easily secure a significant share. Just look at the inroads they made in the UK and Europe). He was a persistent advocate of a strong dollar policy (and he meant it; his stance represented a 180 degree change from earlier Clinton Administration efforts to weaken the dollar to put pressure on Japan). One of the reasons is that prolonged currency weakness was believed to be unfavorable to the standing of financial centers.

Rubin also pioneered covert banking bailouts. US financial firms were heavily exposed to the 1994 peso crisis. Congress rejected a rescue package for Mexico. Rubin then raided the Exchange Stablilzation Fund, a large kitty created in the Depression and under Treasury’s control, to do exactly what Congress had nixed, which was help the banks (a motive not openly discussed) by assisting Mexico.

Surprising as it amy seem, Rubin also bears considerable responsibility for global imbalances. In the 1997 Asian crisis, Japan wanted to lead a rescue effort within Asia, relying primarily on Asean. Rubin and his protege Larry Summers beat that back aggressively and insisted the IMF lead the rescue efforts (which by the way, all called for greater opening of capital markets, when hot money inflows had been the proximate cause of the Thai and Indonesian booms and busts). And the overly aggressive, inappropriate measures imposed on Thailand, Indonesia, and South Korea left a strong impression on all countries in the region: never never get in the position where you might need help from the IMF. That led them all to peg their currencies low in order to build up large foreign exchange reserves. If you look at charts showing the level of private debt to GDP in the US, the increase goes parabolic starting roughly in 1999.

Rubin was also famously the leader of the successful fight against Brooksley Born’s efforts to regulate credit default swaps.

Yet Rubin somehow has the aura of being untouchable. From Bloomberg:

Rubin, 71, has been perceived as “bullet-proof” because his Citigroup job was “framed as if he was only there to give advice,” said Charles Geisst, author of “Wall Street: A History” and a finance professor at Manhattan College in Riverdale, New York. “Unless they’ve actually got some stuff where he advised on some surreptitious deal that went bad or his advice was purposely misleading, they’re going to have a very difficult time with him.”

Yves here. Ahem, the problem isn’t that there probably isn’t dirty laundry, it’s that Rubin normally limits his interventions to those at a similarly lofty level who will therefore never rat him out. And no one will go in and demand a data/e-mail dump. Rubin did call Treasury to try to get it to intercede to avoid a downgrade of Enron, and the press for the most part politely ignored this hot potato. Similarly, Rubin repeatedly pushed Citi management to take MORE risk in the credit markets. So even the little we can see of Rubin’s record at Citi is far from clean.

Mind you, I am not suggesting he did anything criminal, and that it the problem with the standard that the FCIC and SIGTARP seem to be using. Reader Andrew Dittmer describes why “Were crimes committed?” is the wrong question to be asking:

A substantial fraction of financial services industry activity over the last couple of decades has been directed toward “financial innovation” in the sense of Martin Mayer: “finding legal ways to do things that used to be illegal under the old rules.” The periodic blowups have been dealt with by producing a scapegoat whose misbehavior was so blatant that it could be punished under the criminal code. The result is actually to support a framework in which enormous rewards are granted to people who devote their lives toward freeing corporate organizations from the pain of democratic supervision. I don’t think any compromise is possible on this point – if Congress resolves the tension through symbolically punishing a couple of egregious offenders, that would signify a step backwards on the road towards a non-predatory financial system.

The only way to get out of this trap is to focus attention on what it means to maintain a sector that is addicted to finding ways to turn the rules that bind it into dead letter, and to supplying this skill to others as a paid service.

Yves here. In other words, we need to come up with standards of what should be unacceptable behavior. Rather than focusing on what was legal, which gives an industry that devised overly lax rules an easy out, we need to identify what products and practices were destructive. If they happened to be legal, that is prima facie evidence that we need new rules.

Euro

The day the dream went right back to base
There was blood on the ground
Blood on the sand, blood all around
And Minnie and Mickey, Brer and Pluto secretly prayed
There was no doubt at all, no two ways about it
Was the day Disney's dream debased
-- The Wonderful and Frightening World of The Fall

Things are looking a little strained for "old Europe," though one could say the Euro is about as new as Europe gets. Nonetheless, the great global financial bubble instigated by the "financial innovations" of the past several decades has now officially entered the global currency markets. The great experiment in untethered money is destined for the dustbin, but it will take many years to play out and no doubt ever greater volatility till some new order is agreed upon. Greece is getting all the attention, but if the austerity solutions bandied about in the financial press are to be the rule, you can fairly quickly fill up both hands with European nations who will have to follow suit, such as Portugal and Spain. And let's not forget the Brits and the pound. Yves Smith has a good summation about what's going on. It shouldn't be the poorest who are left facing the full brunt of the consequences of the failed policies of wealth, but that would indeed be ahistorical.

The most important thing to understand is that the financial innovations, specifically in this case, credit default swaps(CDS), are playing a catalyzing role in the crisis. There's an excellent must read piece in the WSJ stating:

Again, derivatives, known as credit default swaps, are playing a part in the current trading. Some of the largest hedge funds, including Paulson & Co., which manages $32 billion, have bought such swaps, traders say, which act as insurance against a default by Greece on its sovereign debt. Traders view higher swaps prices as warning signs of potential default.

Now, that paragraph could take volumes to unpack, but let's look at two important points. CDS are playing the same role the gold standard played in catalyzing currency instability in the 1920s. Under the gold standard, forces could destabilize a nations currency by forcing a nation to deplete their gold supply, thus weakening the currency. The mechanisms of using CDS are different, but the results are the same. By piling on positions against a currency, our financial lords destabilize it and can force the devaluation of the currency. As the Journal points out,

Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis...It is impossible to calculate the precise effect of the elite traders' bearish bets, but they have added to the selling pressure on the currency—and thus to the pressure on the European Union to stem the Greek debt crisis.

The Euro is down 10% since the "bets" began in earnest. But the more important point is the Orwellian take, and what has been the great propaganda of the financial innovators for the past two decades that they provide "insurance." Remember, one of the great lines used until the Panic of 2008 was the financial innovations "spread risk." You don't hear that term anymore, which is funny because they were right. The risk was spread to you and me. The tax payers' bail out of an utterly failed system continues.

What came out of the experiences of the 1920s was unanimity in understanding the value of currency stability. The end of the second war Bretton Woods Conference developed a regime that worked fairly well for several decades. Its remnants, most notably the dollar reserve system, helped provide stability for a couple more decades. Aside from the manipulation enabled by the financial innovations, the currency crisis is fundamentally about the tremendous imbalances in the global economy. We must understand Keynes' point that all currencies derive their value from interaction with the material economy, so as that economy changes currencies will need to change. There are ways to wall-off great parts of the economy, providing longer term stability, but we have taken down all the walls, and left the entire economy to the vagaries and manipulations of a few traders. For the immediate term, the hand has been dealt and we're watching the current game play out, we are going to have to change the rules.

Also, here is Jan's better piece on Boron.

Boron

Oh, if you ain't got the dough-re- mi, folks, you ain't got the dough-re-mi,
Why, you better go back to beautiful Texas, Oklahoma, Kansas, Georgia, Tennessee.
California is a garden of Eden, a paradise to live in or see
But believe it or not, you won't find it so hot
If you ain't got the dough-re-mi.
-- Woody Guthrie

Yesterday, a friend and I took a drive out to the high desert north-east of Los Angeles. He was covering the story of the lock-out of the Rio Tinto borax miners. In a parking lot outside of Dodgers Stadium, we met up with a caravan of LA labor organizations who were bringing two semi-trucks filled with food to the locked-out workers. We took the 5 through the valley, cut across the San Gabriels, and then dropped into the vast high desert plains of the Mojave. Boron sits at the southern edge of the Mojave, a 90 minutes drive from LA, but it may as well be a different universe

Boron's only reason for existence is the vast open-pit mine sprawling across the town's northern borders. The world's second largest deposit of borax, that is boron, number five on the periodic table. It's used in agriculture to semi-conductors, and many things in between. In the US, Borax was first found in Death Valley, a hundred miles north of Boron, making famous the iconic twenty-mule team, which would bring the borax out of the valley to the nearest railroad. Boron's welcome sign claims the mule-teams.

Today, the massive mega-corporation Rio Tinto owns the mine. They are one of the top global producers of iron-ore, aluminum, copper; the minerals which if you consider oil the life blood of modernity, these minerals comprise modernity's bones. Rio Tinto was formed in Spain at the end of the 19th century growing to gobble up mining operations across the globe, including the mine at Boron several decades ago. They're headquartered in Melbourne and London, doing five-billion in profits last year, and are currently valued at $100 billion.

Driving through town, it's hard to believe Boron ever had a hey day. Today, it has a population of 2,000 people, a thousand less than it had ten years ago. Six hundred of them work at the mine. Half the stores on the main street are shuttered and seem to have been for a long time. The houses are small, many in disrepair. The US Census says Boron's average house is worth $57,000 dollars, compared to $119,000 nationally, and $211,000 in California. Almost 90% of the population is white, which is way, way over the average for California. The Okies coming out of the Dust Bowl in the '30s found work at Boron. Their they stayed. Many employees of the mine are second and third generation.

Rio Tinto locked-out their workers three weeks ago and started hiring non-union replacements, "scabs" in the vernacular. The dispute revolves around jobs and hours cuts, and the voice of the union in company affairs. Employees make $15,000 - $29,000 a year, with the average in the low twenties -- yes, those are "good union wages" in 2010 America. One locked-out worker, a single mother in her mid-30s said, "It's not about the money," but how much control the company will have over their lives.

Labor has been on its back in this country for so many years now, it's hard to remember it ever having power. It was in critical condition in the late 70s, then came "Morning in America". Mr. Reagan fired the air-traffic controllers, sending the signal it was open season for union busting. If you were in politics in Illinois you watched it across the state. One of my uncles was a pressman for the Chicago Tribune. He helped Stilwell along the Burma Road in WWII, and spent almost forty years at the Tribune in a good union job. They locked them out in the mid-80s, shipping in scabs and breaking the union. None of them got their jobs back. It took them years to get the Tribune Company to cough-up their pensions -- Morning in America.

Across history miners have never had it very good. It was slave labor for most of recorded history, and they've fought for everything they've ever gotten. In 2010 they're still fighting. The most interesting and hopeful thing about yesterday is that LA labor caravan was predominately black and Latino, more than 80%. They were bringing crates of beans, meat sauce and orange juice to an overwhelmingly Anglo workforce -- solidarity brothers and sisters, now more than ever. As the mega-corporate noose grows ever tighter, remember the words of Mr. Franklin, "We must all hang together, or assuredly we will all hang separately."

Lords of Finance

You could not step twice into the same river; for other waters are ever flowing on to you.
– Heraclitus of Ephesus

Liaquat Ahamed's Lords of Finance is an excellent read on the financial predicaments of the 1920s. Though we face different circumstances today, Ahamed's history of the era offers much understanding on how we got here, providing valuable knowledge on where we need to go.

Lords of Finance focuses mostly on the four men who ran the central banks of the US, Britain, France, and Germany in an era of great financial turbulence leading to the Great Depression. It is an excellent popular history, painting a wonderful picture of the era and of those whose helped, for better and worse, to define it. It also does a good job of laying forth the financial conundrums in a way people can understand.

Mr. Ahamed's main contention is that the gold standard was the main culprit behind the currency turbulence of the 1920s. However, I think the story he tells leads to a little different conclusion -- debt was really the main problem -- and the gold standard both a catalyst aggravating the situation and a hindrance in developing solutions. The end of WWI saw a much different world than the beginning, especially in the financial sector. Most important, three of Europe's great powers became indebted to each other and the new American financial colossus, representing a shift in underlying economic power that would cause havoc for the next ten years. Ahamed writes:

They burdened a world of economy still trying to recover from the effects of war with gigantic overhang of international debts. Germany began the 1920s owing some $12 billion in reparations to France and Great Britain; France owed the United States and Britain $7 billion in war debts, while Britain in turn owned $4 billion to the United States. This would be the equivalent today of Germany owing $2.4 trillion, France $1.4 trillion, and Britain owing $800 billion. Dealing with these massive claims consumed the energies of financial statesman for much of the decade and poisoned international relations. More important, the debts left massive fault lines in the world financial system, which cracked at the first pressure.

In his seminal The Economic Consequences of the Peace, Keynes wrote the war debt, particularly the punitive reparations placed on the Germans, would lead to economic calamity. Over the course of the next decade, Germany, Britain and France would scramble to keep this debt from crippling their domestic economies and exports. The debt led to continuous currency volatility, including Germany's hyperinflation of the early 20s and then the collapse of the entire system by the end of the decade.

Lords of Finance is the story of the constant interaction between the four nations' central banks and their attempts to create a stable currency situation, with the US playing the role of lender of last resort. Mr. Ahamed shows how sticking to the gold standard aggravated the situation and getting off the gold standard eventually alleviated some of the problems. However, the debt and underlying real economy imbalances in the system would take a decade and half and another world war to come to a resolution.

The gold standard was not so much a cause of the currency destabilization as a catalyst. It forced more frequent and severe valuations and revaluations then was necessary. Gold is an anti-inflationary money base and inflation is finance's worst enemy. All debt loses value with inflation, thus if you want the money you lent back, you want to keep inflation at a minimum. The natural scarcity of gold helps curb, but does not prevent inflation.

This is important for understanding the present global economic predicament. The question of debt, not just in the US, but in Greece and other nations in Europe is leading the news. Yet, even without the gold standard, debt is causing increasing turbulence in currency markets. Our modern lords of finance are just as fearful of inflation as their predecessors, and while they don't have gold, they have derivatives and other financial innovations as a catalyst. They are fearful of losing their money. They are slowly turning the screws on many nations to create no more debt and pay what they owe. The debt and increasing volatility are beginning to jam the wheels of commerce.

The debt problem of today is exponentially larger than the 1920s. In the past decades, we have added layer upon layer of "innovative debt" on top of more traditional debt. Advocating more debt, without getting rid of existing debt, will slowly strangle the future. Mr. Keynes understood this better than his disciples.

Just as after WWI, the debt and currency volatility are pointing to underlying real economy imbalances. Unlike in the 1920s, the US is not the planet's largest creditor, it is the largest debtor, yet it still plays the role of lender of last resort. Ahamed writes of the 1920s:

Eventually the policy of keeping US interest rates low to shore up the international exchanges precipitated a bubble in the US stock market.

Today, Mr. Bernanke keeps interest rates low and pumps up not only the US stock market, but creates new bubbles across the globe. Neither this or the debt ocean created in the last thirty years is sustainable.

We have new lords of finance. While the Fed remains powerful, debt has grown to such a degree to make it less so. Over the years, the Fed has ceded power to our new lords of finance on Wall Street and in the mega-banks, who have created more debt in the last several decades then the world has seen in all its previous history. At some point, just as the WWI war reparations and war debt was written down or off, we are going to have to do the same without cratering the economy. We need to dethrone the new lords of finance and place the real economy, in all its diversity and concreteness in charge. We need to bring this queer thing known as money down from the marble palaces and into the democratic assembly.

energy as political reform

The WSJ has a good piece on the beginning of the adoption of smart electricity meters, which is a start to changing our electricity system. Ten years ago, the utilities were pretty much unanimously against these meters, so it's good to see them starting to install them. It offers a lot of lessons on how we're going to need to change how we do things and the obstructions encountered in so doing.

The WSJ writes:

To date, 16,000 to 18,000 people have participated in more than five dozen pilot tests involving smart meters and experimental rate plans, according to Ahmad Faruqui, a consultant with the Brattle Group who has helped utilities develop some of the programs. He says that while it is sometimes disheartening to see utility executives ignore their own findings, he understands the desire to move slowly until people become comfortable with smart-meter technology.

That's a pretty small number, but its a start. The biggest problem of course is the utilities, who having run the system pretty much the same way for almost a century. They don't see much need to change. The simple agreement has been the utilities provide electricity at a reasonable, and some would say a very cheap rate, and people basically allow the utilities to run things whatever they want. Leading to the second problem, most electricity users pay very little attention to how they use electricity, first and foremost because its so cheap.

Information is always cheaper than energy, getting more information into the system, allows things to change. I have always been astounded in dealing with the electricity industry how it was almost universally accepted that more information about how things were run, wouldn't provide any value. This is still a big problem and as the article points out, the utilities don't even know what to do with the information they are receiving. Simply giving them more information isn't going to help, or will not be as helpful as it could be. The electricity system in this country is run by government bestowed monopolies. Political reform needs very much to be utility reform. We need to open the system so that not just the utilities, but others who will know what to do with the information can enact necessary change.

The WSJ writes:

"You could have a real rebellion" if smart meters push up customers' rates, especially if utilities' other capital expenses are increasing, he says.

There's probably few industries which as much fixed capital debt as the utilities, and it seems at times this debt is never ending. It is an important point for the United States. We are an extremely wealthy nation, however much of our fixed capital, particularly in regards to the energy sector, is the problem. We have to change how this operates and the more debt we pile on the existing infrastructure, the more difficult that change is going to be. Unlike the developing world where such infrastructure is limited, adding to it creates wealth. In the United States, changing this infrastructure is not creating new wealth, but transferring established wealth to new purposes. It is an extremely important distinction. Power is going to have devolve from the utilities.

Electricity users must educate themselves and be part of the change. Being a citizen in the 21st century means understanding energy.

Hack Politics

I'm trying to not spend too much time on hack politics, that is establishment electoral politics. Unfortunately, sometimes I can't help myself and other times, I think no one understands how to interact with politics in any other way. So, despite knowing better...

I believe we're in the beginning of a long period of switching people out every election until some sort of viable alternative develops. At this point, the best thing either party has going for itself is the other party. Many people are comparing this year to '94, but it's much different, and will be shown to be if the Dems get a health care bill passed, they'll still probably lose the Congress. But there's a much bigger difference between now and 1994. The Dems kept control of the Congress for another 14 years after the fall of the New Deal coalition via simple inertia. The party was losing seats almost every cycle since 1964 and was ready to drop well before '94, just the Reps were never that well liked.

In '94 amongst the Dem political pooh-bahs, the thought the Dems could never lose the House was simply gospel, despite the fact the numbers showed they were easily ready to go down. This year is different because the Dems just regained control in 2006, there is no inertia, and no established political doctrine like the New Deal. The Dems regained power for one reason, they were not the Reps, and the Reps will regain power for the same reason, they are not the Dems. Now, if you think this state of affairs depressing, you'd be right. Nate Silver has a nice little piece about the numbers right now, and they are truly atrocious for Dems, except as he points out, if you are Rep. However, the Reps need only rely on a little more time, we Americans have short memories, and a little gain in credibility, and their numbers will begin going up by end of summer. After all, as Kang said, or was it Kronos, "Vote for a third party, go ahead waste your vote!"

The polling numbers of the past year have really been neither Dem or Rep favorable, they have been completely and virulently anti-established politics. If they stay that way, more than a few Rep incumbents will also meet defeat this November. In fact, unlike most years in our politburo type incumbency return numbers, getting rid of your party's incumbent before the general will in many cases serve you well. There's two numbers of great importance for November, unemployment and the Dow. If Dow is about 10,000 and unemployment below 9, the Dems can hold on. Unemployment above 10 and the Dow below 10, the Dems will likely lose both houses to a group of people who have no better idea what to do than those they're replacing. Our politics is broken.

Pushing on a String

Marriner Eccles is a figure too little known to American history. He was a banker in Utah, who became Fed Chief under Roosevelt. In Feb of 1933, Mr. Eccles gave what might be one of the greatest Senate testimonies in history. The St. Louis Fed has it here and it is essential reading. Eccles, before Roosevelt was even sworn in lays out the intellectual, economic, and pragmatic rational for much of what would become the New Deal. No Keynes or economic priesthood, just a Mormon banker with some years of banking experience--the radical pragmatism that has always been this republic at its best. Again, I couldn't more highly recommend reading Eccles testimony.

What little that is remembered about Eccles is his remark of a few years later. In an entrenched deflationary environment, monetary policies eventually become useless, simply flooding more money into the system is the equivalent of "pushing on a sting". The question is if our present Depressionary historian/Fed Chief has ever read anything about his predecessor, or if in his monetary indoctrination, Mr. Bernanke was taught to disregard Mr. Eccles.

Today the FT reports:

The prices of US goods and services, excluding food and fuel, fell last month for the first time since 1982, as aggressive measures to stimulate economic growth failed to inflate the cost of living.

A year ago, someone said to me, "Well, everything Bernanke is doing is inflationary, right?" I replied, "Well, that's certainly what Mr. Bernanke hopes." I think we've learned a lot about hope over the last year.

So, as Cato the Elder took to ending every speech "Carthago delenda est," Jefferson ended his letters, "Divide the counties into wards," we need say, "Debt needs to be written down."

Walmart and Deflation

Last year as the economy slowed, Walmart sales kept rising. It became the store of last resort. So it's certainly interesting that in the last quarter, Walmart announced its first ever sales decline. The FT has the article stating:

Walmart the world’s largest retailer, said comparable sales at its US stores fell 2 per cent during its fourth quarter against last year, and warned of a “more challenging” first quarter in the US, compared with last year’s strong growth.

and

Walmart attributed the fall to factors including deflation in the price of groceries – which account for more than 40 per cent of US store sales – and electronics such as flat-screen televisions.

and

It ended the year with inventory down 7.8 per cent against the same period last year, as it continues its store profitability drive and benefited from deflation. “US sales will be more challenging in the first quarter, as Walmart US cycles through strong year-over-year comparisons and deflation,” he said.

They do seem a little confused on whether they're benefiting or hurting from deflation. Finally we get our requisite Morning in America spin from the CEO. It's interesting how the politicians in this country take so much grief for the garbage they spew, but if anyone's ever listened to one of our mega-corporate CEOs, most of our politicians pale in comparison:

Mike Duke, chief executive, said Walmart earnings for the fourth quarter had exceeded its expectations, reflecting “the ongoing underlying strength of our business” and its focus on “delivering growth, leveraging expenses and improving returns”.

As the great corporate globalization experiment was undertaken over the last three decades, the undeclared deal was Wall Street and our mega-corporations shuttered the American industrial base, made a lot of money reopening it across the planet, American wages stagnated or went down, but we all got to shop at Walmart which imported formerly US manufactured products at cheaper prices to go with the lower wages. This process was over several decades, but in the last year, there was a new and significant leg-down, and now many can't even afford to shop at Walmart, which ain't great news for the Chinese either.

The new normal is slowly emerging, it's going to force us to do a lot of things differently. If we do it right, we can do it better, but it means we need to change.

Foundation and Energy

Violence is the last refuge of the incompetent. -- Isaac Asimov

In 92, after an attempt to ring the warning bells on our corrupt and increasingly dysfunctional politics, I fled for a few months to the hinterlands of China and Indonesia. In a small book store on Java, I found a copy of Asimov's Foundation Trilogy and read it while traveling the buses across the teaming mass of humanity that is Java and through the last crumpling stands of ancient forest on Sumatra. The book left a profound impact. First, as I discovered later, though it was science fiction, Asimov used Gibbons' Decline and Fall of the Roman Empire as the basis for the storyline, and I am a great lover of history. Secondly, it gave me an insight to the politics of technology.

Foundation is about a declining galactic empire/civilization. A group of people understand its faltering and form the Foundation, whose idea is to keep alive some of the best of the civilization, so that it will not be as long a time between decline and renaissance. In the first book, they literally keep on the electricity of a small planet on the former empire's fringe. Knowledge of such matters has become so scarce, electricity is basically considered magic, and when trouble comes, they turn-off the electricity as a show of power.

The unfortunate thing about electricity today is most people consider it magic. They know they flip the switch and the lights go on, it might as well be magic, and that leaves power of energy very concentrated, a rather small group in charge. Science fiction became reality in 2000 and 2001 in California, when a group of energy companies and Wall Street took over the electricity system in California and started turning the lights off to extort higher payment. No one went to jail, but Gray Davis the hapless and inept Governor, felt the citizens' ire three years later and became the first Governor recalled in the state's history.

Over in Europe, the Russians pulled a similar trick a few years back in the middle of winter by squeezing natural gas supplies to the now Russian gas dependent Western Europeans. Der Spiegel has a good piece(tx yves) about Germany's attempts to build various pipelines to remove itself from the "Russian Yoke." While being dependent on the fuel source, and thus susceptible to cut-offs, isn't quite as magical as turning the generators off, it does again show the reliance of what we deem modernity on fossil fuels.

Which gets us to the announcement of the Obama administration and nukes, which is problematic on many levels. First, the administration announced it was providing $8.3 billion in loan guarantees for building new nukes to the Southern Company, a paragon of corporate integrity. I suppose one could say this is an improvement over the after the fact debt guarantees we've provided Wall Street, but nuclear power has never been ever to survive without massive government subsidies. I don't have anything against subsidies, just what is subsidized.

Nukes are the most undemocratic of technologies. They are centrally controlled and require both a police force and priesthood to secure and run. We still have not figured out the waste problem, leaving the future a problem that's going to be around for thousands of years. Haven't we done enough for the future already? Finally, the more nukes the greater the proliferation of technologies and raw materials to build nuclear bombs. While we hear a lot about the Manhattan Project, the real effort in building the first atomic bombs was in Tennessee and Washington states, not New Mexico, where they had to build the vast industrial infrastructure, reactors, to make the bomb's fissionable material. Which is why Iran can't hide their nuclear programs, creating the nuclear material is a vast industrial process. More reactors bring the price of making bombs down.

Nuclear power is the energy of the military industrial complex. The amount of money spent on its development and implementation has and continues to dwarf all alternatives and efficiency. The Department of Energy remains the Department of Nuclear Power. The 2011 budget calls for $20 billion dollar for nukes, with $2 billion on renewables and efficiency.

If we're going to have democracy in the 21st century, we need a democratic energy system. If we're going to have that, people are going to have to become much less ignorant on energy issues. I can suggest starting with Peter Asmus' "Introduction to Energy". It should be core curricula for every high school student in America.

Enron Accounting

A few years back, Congress did a hearing on the smoldering remains of the once bright burning Enron. In one session, a couple of boys from Wall Street were up describing the various vehicles and structures they had used to make Enron the paper tiger it was. At one point, one of the Senators even stumbled on the fact that they were creating these structures inside an American corporation in deals with other American corporations in offshore accounts in the Caribbean. Ho-Ho, thought I, this will be good. But that was it, just the fact, no further digging on why American corporations were running their internal books off-shore. Instead, we got Sarbanes-Oxley, and we've all seen how much good that was in keeping the books straight on Wall Street and the banks.

The fact is Enron type, and actually more creative accounting, remains the norm across the financial sector. The ability to account one dollar as two, three, or even ten, but best when you can count a dollar loss as a couple dollars gain. FT Alphaville(tx yves) describes one of the latest flicks of the accounting pencil with Barclay's just released results:

If the reclassifications had not been made, the Group’s income statement for 2009 would have included net losses on the reclassified trading assets of £49m (2008: £2m).

After reclassification, the reclassified financial assets contributed £192m (2008: £4m) to interest income.

Meanwhile, Enron accounting was, and remains, in full use with the Fed and Treasury, especially in using your taxpayer dollars to buy the banks schlock. The FT has a piece showing Bear Stearns "assets", now on the Fed's books, are worth at best half for what we purchased them. Just a reminder why Chairman Bernanke stated last week the well over trillion dollars of bank garbage on the Fed's books would be staying on the Fed's books for a very long time -- more Enron accounting.

In a related piece, John Hussman has a good write-up of what's happening at Fannie and Freddie. While the Fed may be winding down their purchase of bad bank paper, Fannie and Freddie have stepped into the breach. Hussman writes, "Over 60% of the U.S. foreclosure market now falls under the umbrella of these two entities."

How long can as system function and continue with creative accounting standards and the so-called regulators are the leading artists? That indeed is the question. With a partial answer is Richard Koo, with an excellent interview here. Koo has been influential in promoting the not so new idea of a "balance sheet recession", which is actually more or less looking at things from a non-monetarist's view of the world. Too much bad debt clogs the system, as in the case of Japan, and thus people spend years paying down the debt, while the government steps in to at least keep the economy flat. Koo gives a succinct explanation to understanding why the banks aren't lending:

In these cases, after an asset pricing shock, after a bubble bursts, the private sector’s balance sheets are under water. When that happens, the first priority of people in the private sector becomes to minimize debtsinstead of to maximize profits and if there are enough under water balance sheets around, even if you bring interest rates down to zero, still nothing happens. People with balance sheets under water will not be increasing their borrowings and there won’t be too many willing lenders to those guys, either. So the effectiveness of monetary policy goes out the window, exactly as happened during the Great Depression in the U.S. and in Japan during the 1990s —and as is happening in the U.S. this time around.

Koo also points to the developing world's massive debt problem in the 80s and the Fed's and Treasury's reaction, which as I recently pointed out is very much the playbook now being followed. The public swallows a great deal of the loss and the rest is extended to be paid over time. Koo is right about a lot, but not enough. Japan showed there's problem "extending and pretending" in a mature industrial society. Over time, the debt simply ties you to the past and inertia becomes dominant. Without destroying, writing down, call it what you want, a great deal of this bad debt, the American economy is fated to be stagnant for years to come. However, unlike Japan, the political reaction will be quicker and more volatile, though that certainly remains to be seen.

on money--VII Populists and Sun Kings

Let me issue and control a nation's money and I care not who writes the laws.
– Mayer Amschel Rothschild

Money is the ultimate social construct. Unless comprised of some valued commodity, money has no value outside the political economic system which created it. As a part of political economy, money is an element of power. How money is defined and how it is created are essential questions for the architecture of power and the the stability of any system of political economy using money. Outside a brief period in the 1930s, when the issue of the gold standard and the question of the government's role in creating debt popped into political debate, the money question in United States was settled with the defeat of the Populists in the 1890s.

The Populists were a broad coalition comprising many elements of late 19th century American landscape, but the majority were small and mid-size farm owners, joined by workers and the small businesses reliant on the established farming system. The Populists rose up out of the great deflationary period transpiring from the end of the Civil War until the 1890s. Deflation is a complex phenomenon, but its impact on the small American farms of the era was felt with the decreasing of crop prices every year. Many farmers would often borrow at the beginning of the year to gain the seed and other materials needed to plant and grow, paying back at harvest. However, if you were borrowing based on prices from last year and the next year's prices were less, you'd soon end up in an ever increasing spiral of debt. Additionally, the railroads, as the main means of transportation to bring crops to market, were increasingly exerting their power over farmers. The railroads manipulation of the system through prices and other means could quickly bankrupt a farmer. Bill Gates and Microsoft's manipulation of the personal computer industry was nothing new to the railroad barons of the 19th century.

Organizing together in the Farmers Alliance, the farmers figured out two things. The new railroad technologies and a money system based on the gold standard were combining with other forces to create ever falling prices and ever increasing debt, destroying the farmers' independence and their lives. The Farmers Alliance decided regulation of the railroads was needed. They also developed a completely practical and ingenious system for allowing a democratic definition, creation, and control of money. Instead of money being simply based on gold, and its creation controlled by the burgeoning industry of finance--Wall Street and the banks--the Populists devised a “sub-treasury system”, allowing them to gain credit based on one thing, the fall harvest – their crops.

The idea was as practical as it was simple. Sub-treasuries would be set up in large counties across the country. Into these treasuries farmers could deposit grains, which they could then draw money, credit, provided by the federal government. Instead of gold being the only money standard, the Farmers Alliance had devised a system in which the farmers themselves could create money, just like a bank, based on their crops. Not only were they basing money on very concrete and useful commodities, such as corn and cotton, which, unlike gold had real utility, they were in effect making each farmer a banker. Each farmer could create money.

The Populists lost. Over the next two decades, the banks and Wall Street gained control over the creation and definition of money, a control sealed with the creation of the Federal Reserve in 1913. The loss of any ability to control money doomed the small farm in America. Every year for over a century, there have been less small farms. Today, they are close to extinction. There was absolutely nothing deterministic about the death of the small farms, America could have just as easily industrialized, keeping 10 or 20% of the population as small farmers, instead today we have less than 1%. It was and is purely an issue of power, and power in agriculture, finance, and most every other aspect of American political economy has done one thing over the course of the last century, become ever more centralized.

The idea of tying the value of money to useful commodities was not lost with the Populists. In his 1930 Treatise on Money, none other than John Maynard Keynes would promote what he called an international Tabular Standard for money – "representative money" – based on over 60 commodities, including cotton, pork, potash, copper, and coal, the basic components of modern industrial society. Instead, after WWII there was a revitalization of the gold standard.

Without a democratic money system, there will never be much democracy. If we are going to have a revival and evolving of democracy in this country, we need to rethink the money system. Keynes himself well understood the political implications of what money was and how it was controlled, writing in his 1930 Treatise:

Thus the gold standard is...part of the apparatus of Conservatism. ...gold, originally stationed in heaven with his consort silver, as Sun and Moon, having first doffed his sacred attributes and come to earth as an autocrat, may next descend to the sober status of a constitutional king with a cabinet of banks; and it may never be necessary to proclaim a Republic. But this is not yet – the evolution may be quite otherwise. The friends of gold will to have be extremely wise and moderate if they are to avoid a Revolution.

Gold was dethroned in the early 70s, though there's certainly many old courtiers clamoring for its restoration. But, we have an even greater problem at this point with our money system. With an unchecked Fed, Wall Street, and ever increasing concentration of banking power in several corporations, we have the most autocratic money system in our republic's history.

political economy and debt

The reason why we have not made more progress in social matters is that these problems have not been tackled by the practical man of high ability, like those who have worked on industrial inventions and enterprises. We need social inventions, each of many able men adding his work until the invention is perfected. -- Louis Brandeis

With the rise of Greece to the front pages(that's a bit of an anachronism these days isn't it?) the question of debt, both national and private, has come to the front. Most importantly, it begs the question of how much debt is sustainable, and that is not an easy question. Many professed "Keynsians" have stated and they are not incorrect, that in a time of economic recession, the government needs to step-in to mitigate the slow down and help get the economy moving. One thing most Keynesians leave out is Keynes, despite being quite radical thinker on many fronts, was also very much a classical economics thinker. He believed at some point the books needed to be balanced, and after all, accounting is really the only scientific aspect of economics, if you throw that out, there's really no foundation for anything else to rest on.

For Keynes and many of his adherents, the magical elixir for balancing the short-run books over the long-run is growth, and this is where the world of 2010, particularly for the developed world, has tremendous problems. If we look at growth rates for the US economy in the 1950s they averaged 4.2%, the 1960s 4.4%. However in the 1970's, it was down to 3.2%, the 1980s 3.1%, the 1990s 3.2%, and finally the 2000s 1.9%. Two of the reasons for this decline in growth are first oil, which spiked in the 1970s and then came roaring back in the mid-2000s. The second is the limits for growth in an established industrial economy. Of course this isn't just an American problem, for example in the 2000s, the German economy expanded on average 1.2%, while the Japanese since their financial bubble burst have barely squeezed out 1%. Those three economies together comprise almost a third of global GDP.

The new twist that has been added to the American and Japanese picture is the astounding rise in debt over the past two decades, an attempt to keep the economy growing at what previously would have been considered slow rates of growth. The argument of how to deal with this question basically falls into two camps. The first states we need to increase debt. We eventually will grow out of it, despite the facts this simply no longer seems the case. The second is what is now being prescribed for the Greeks. They need to start cutting their living standards so they can pay-off the debt they have accrued. The important thing to understand is the two camps, the deficit-spenders and the deficit-cutters, look somewhat differently at who benefits. The deficit-spenders look more at wage earners and how to keep the economy working for the greatest number. The deficit cutters are predominately looking at the financial component and most concerned about keeping the value of established debt so they will get a return on their investment.

However, we need to start looking at things a new way. I'd suggest people start with reading Keynes excellent Economic Possibilities of our Grand Children. Here, Keynes deals with the question of industrial society reaching the limits of productive growth and asks where do things go from there. For older industrial nations are, while maybe not quite where Keynes thought we could be, nonetheless, close enough that it is essential to begin moving beyond the thinking and restrictions of industrial finance and production. The debt problem allows us the opportunity to do just that.

We must come to the conclusion that a significant portion of debt created in the past several decades is simply not going to be paid back. We need to write it down. Simply piling up more debt on top of this already bad debt is going to restrict the future--your children and grandchildren--in a way that really is unconscionable. Along with writing down the debt, we're going to have to reshape how our political economy works. In his Treatise on Money, Keynes writes:

Entrepreneurs are induced to embark on the production of Fixed Capital or deterred from doing so on the profit to be made. Apart from the many minor reasons why these should fluctuate in a changing world, Professor Schumpter's explanation of the major movements may be unreservedly accepted. He points to "the innovations made from time to time by the relatively small number of exceptionally energetic business men -- their practical applications of scientific discoveries and mechanical inventions, their development of new forms of industrial and commercial organisation, their conquests of new markets, exploitation of new resources, shifting of trade routes and the like. Changes of this sort, when made on a large scale, alter the data on which the mass of routine business men have based their plans. But when a few highly-endowed individuals have achieved success, their example makes the way easier for a crowd of imitators. So, once started, a wave of innovation gains momentum.

It might come as a surprise to the segregated orders of our economic priesthood that Mr. Keynes could agree with Mr. Schumpter. Of course Keynes was speaking exclusively of industrial economy, and there is no doubt, we are in massive need of "creative destruction", particularly in the energy sector and most specifically with oil. Today, The FT points out renewed economic growth would shortly send oil to a $100 a barrel. Make no mistake, whatever you think about debt, the American economy as presently structured, nor the corporate globalization of the past several decades can operate on a $100 a barrel oil.

We need "creative destruction" across our political economy. If we can no longer simply rely on growth? If automation loses as many jobs as off-shoring? If physical limits of a finite planet demand an end to unbridled consumption? If all these add-up to a necessary and vital rethinking of political economy, how do we begin? I would suggest by rethinking the citizen, that we redistribute the roles of decision making in society, loose it from the mega-corporate executive suites and the marble mausoleums of DC and bring it into the capable but now empty hands of the citizenry. Create new institutions and processes of democracy, that value the hard work of politics at the same level we value work now associated with the economy. We must go about the business of building a new political economy. If we continue on, chained to industrial thinking, both the deficit-spenders and the deficit-cutters will be proved wrong. Wage earners will continue their slide and the debt will not be paid. The more we pile on debt to save the status quo, the more we lose the future.

on money -- VI

But the volume of trading in financial instruments, i.e. the activity of financial business, is not only highly variable but has no close connection with the volume of output whether of capital goods or of consumption-goods. – JM Keynes

Over the last forty-years, money was untethered from any objective value and became another product to trade. Money became, in many respects, simply another trade in the entirety of a financialized economy. One component of the definition of financialization is “to make trade-able”. However, a monetary system, and even more so an economy, which become entirely trade-able, are prone to instability and catastrophic volatility. Unless you're purely a speculator, instability is the exact opposite of what you want from a sound money system.

Previously, I explained Keynes very helpful notion that, in part, money is valued through its constant interaction with the rest of the economy. Money gains value from an economy's wealth, debt and prices. He placed the various valuing mechansims into the categories of Money of Account and the General Purchasing Power of money. Again, for this exercise, it's not necessary to go into detail on Keynes' definitions, for as he remarks in the Treatise:

The fundamental equations of Chapter 10 are in themselves no more than identities, and therefore not intrinsically superior to other identities which have been propounded connecting monetary factors.

Phew, what trouble such honesty could cause our economic priesthood today! However, the point to be made is, at all times, money constantly interacts with the whole financial system and economy to gain its value. When an economy becomes completely financialized, that is trade-able, and money is removed from all fixed standards, you allow traders to gain too strong a hand in valuing money, thus increasing volatility.

The so-called “financial innovations” of the last three decades have added further to this instability. Financial innovation was a way to make money more trade-able by adding layers of “swaps” and “obligations” on top of the real assets. This process let the entire banking system carry less reserves – money in the vault – allowing more money, liquidity, into the system. Innovation meant formerly illiquid stores of money, such as long-term mortgages or government bonds, became trade-able, all adding to the overall volatility and instability of the system.

Thus a system in which everything is trade-able, demands a greater volume of money to keep things liquid, literally becoming addicted to greater liquidity, which, as Keynes notes in the opening quote, does not necessarily impact the real economy. What helped along the great elite financial panic in the fall of 2008 was a fall in liquidity, instigating a fall in inflated prices. Suddenly with no excess cash to keep inflated asset prices afloat, the entire system began a major contraction, racing to reach what would be more realistic levels in a system that was not so trade-able, that is liquid.

However, the Fed, other central banks, and governments stepped in to boost “liquidity”, flooding market with dollars, euros, et al, not allowing a deflation in prices and thus transferring the inflated values of assets and the layers of “financial innovations” on top of them, into the currencies themselves. An aside, a better outcome would have been gained by allowing the deflation of financial assets and instead the government flooding the real economy with money to first and foremost keep unemployment from steeply rising. But Ben rolled the dice and how this eventually plays out will be interesting to see, but volatility is increasing in currency markets and as Keynes noted:

...this tendency towards sympathetic movement on the part of the individual elements within a banking system is always present to a certain extent and has to be reckoned with...in the case of the world as a whole, the tendency to instability by reason of sympathetic movement is a characteristic of the utmost practical importance.

In a global monetary system that is hyper-trade-able and currency value is derived in a great extent from trading, volatility combined with what Keynes termed “sympathetic movement” can create great instability.

What we need to begin to do is re-tether money, make it less trade-able. This can be done various ways, for example by keeping mortgages on the originating banks' books, making it much more difficult to trade such things a municipal bonds, or tying certain money or amounts to fundamental commodities like grain or oil. The question of how to solidify excessively liquid money is quickly gaining the utmost importance.

Next: Tethering Money

financial innovation

By the green grass
By a rubbish receptacle
I saw a newspaper
I was not very happy
There was man going around all the time
He was dishing out drugs
He was a doctor
Dishing out morphine to old ladies
I said, What about us?
What about us?
-- The Fall

I haven't and will not write much about the "financial reforms", taking place in DC because it is simply a waste of time. Until we have genuine political reform, we will not get genuine financial reform. Our financial system has been tremendously altered over the past three decades by so-called financial innovation. The only public figure to say much about this is Mr. Volcker, who has stated, and I whole-heartily agree, that this innovation has added no value to the real economy. So, it was dismaying to see Mr. Volcker trotted out in the last few weeks and be completely mute about the question of "financial innovation". Welcome to the new DC Mr. Volcker.

Today, Chris Whalen at IRA has a good piece on financial innovation. It's technical, but worth the read. First he states:

We frequently receive calls from clients and readers asking about the likelihood of the passage by the Congress in Washington of reform legislation regarding over-the-counter (OTC) derivatives, financial regulation and/or mortgage securitization. Our answer is small to none given the political trends and the state of the lobbies in Washington, most specifically the large bank lobby that protects the Sell Side monopoly in OTC derivatives and securities. The fact that Senator Richard Shelby (R-AL) is still apparently not comfortable with the entirely watered down House proposal to reform OTC derivatives, for example, tells you all you need to know. Stick a fork in it.

And:

One of the benefits of spending a lot of time talking and writing about centralized clearing as the solution to all known troubles and woes in the world of OTC derivatives and especially in CDS contracts is that it keeps the attention of the Big Media, the Congress and the regulators away from the front office and the process of creating and selling complex structured securities and derivatives. It is in the front office where the true problems reside, but notice that none of the OTC reform proposals nor the Volcker Rule go anywhere near the sales and trading desks at the large banks.

The whole piece is worth reading to understand the Kabuki reform now taking place in DC. The "financial innovations" are at the heart of our financial problems. The easiest way to understand financial innovations is they were about adding layers of paper on top of the real assets, it is simply about making money on money, providing no value to the real economy. However, what it does do, is make things tremendously more unstable. Yves Smith has written some good things on how financial innovation has been used as a new lever for Wall Street to force instability into the system. They can be used to trigger events, for example a nation's or company's financial soundness, before the real assets might actually face real problems. The latest example is the Greek Crisis. What's good for Wall Street is not necessarily good for anyone else. Move your money.

Unaccountable America

If you wanted a fundamental principle of self-government it would be power is held accountable. If you want the prime example of how power is not held accountable in America it would be Alan "Bubbles" Greenspan. Our former pope of finance, who use to keep the financial world breathless waiting for the latest interest rate smoke out of the Fed chimney and landed a nice gig at the global giant bond-house PIMCO, still is a regular in the corporate media making pronouncements. Today, Bloomberg has some thoughts from the Maestro appearance on Meet the Press:

Former Federal Reserve Chairman Alan Greenspan said a U.S. economic recovery is “going to be a slow, trudging thing,” and that he “would get very concerned” if stock prices continue to fall.

A drop in stock prices is “more than a warning sign,” Greenspan said yesterday on NBC’s “Meet the Press” program. “It’s important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity."

There you have it in a couple sentences. The subjugation of the American economy to Wall Street, led by the Fed. The connection never seemed to be made that it was impossible for the limited numbers of shares on Wall Street to be distributed in any way to make anything close to an equitable economy. Call it Randian economics, or maybe more accurately, randy economics. The first step in reviving the American economy is going to be to loose it from Wall Street's grip. The first step in doing that is to understand the mechanisms that were put in place and to hold accountable all who led the effort. Until then, its going to be a "trudging thing" indeed, or in the words of another unaccountable person of power, Mr. Rumsfeld, "a slog."

The Rape of Europa

And, now perceiving all her fears decay'd,
Comes tossing forward to the royal maid;
Gives her his breast to stroke, and downward turns
His grizly brow, and gently stoops his horns.
In flow'ry wreaths the royal virgin drest
His bending horns, and kindly clapt his breast.
'Till now grown wanton and devoid of fear,
Not knowing that she prest the Thunderer,
She plac'd her self upon his back, and rode
O'er fields and meadows, seated on the God
-- Publius Ovidius Naso

For a god, Zeus sure is a cad. He spends a great deal of time transforming himself into various beautiful beasts in order to seduce fair maidens. It certainly has a great advantage over flowers and candy, such are the privileges of divinity. As chronicled by Ovid, Zeus becomes a sleek white bull to charm Europa. Fifteen-hundred years Titian immortalized "The Rape of Europa" in paint. The Greek historian Herodotus in the fifth-century BCE first gave the lands north and west of Greece the name Europa. The Romans took the name, along with Greece, in the second century BCE. In it's two millenia history, the definition of Europe has undergone many changes, none more so than in the past sixty years with the creation of the European Union. Today, the ongoing global financial mess may give the rape of Europa a whole new meaning.

An easy way to tell when financial matters are reaching criticality is when they reach feature status outside the financial press. Today, both the Post and NYT have articles on Europe's situation. The Post writes:

Investor panic is threatening to drive up the cost of borrowing for myriad nations around the world and to destabilize global currency markets, with the falling euro and strengthening dollar already hitting U.S. exporters by making such items as American beef and U.S. steel more expensive overseas. The euro, the principal European currency, fell Friday to its lowest level in eight months, tumbling almost 1 percent against the dollar.

However, the NYT has the scoop with the acknowledgment that Goldman is the chief underwriter of Greek debt and their job will be to insure bond buyers and holders that the Greeks will make the proper austerity measures and quit living beyond their means. Funny how the bailed-out masters of the universe can so quickly start taking the cleaver to mere mortals. Well, Lloyd did announce for doing "god's work", he was only taking a nine-million dollar bonus on your tax-money. Europa is about to discover anew the consequences of taking a ride on the beautiful white bull.

The Euro is a maiden currency, only fifteen years old and only ten years in circulation, it is about to be strongly tested. The best thing they could do is tell the Wall Street bull we're getting off here, but that certainly is easier said than done. The Euro has certainly been a worthy experiment in bringing civilization to Europe, after centuries of hacking each other to pieces, one would say a noble one. But it brings to the forefront the "money question", and it is a question not only Europe, but the US, China, and the rest of the world cannot avoid. It's time we all got off the Wall Street bull.

The Politics of Technology

The Politics of Technology

With the immediacy of the mess of the financial sector and their quite brutal control of the rest of the economy, I haven't had the opportunity to write much about other issues which I consider just as important, if not more so. At the top would be the politics of technology, which in the end is of vast greater importance than our greedy financiers, though even less understood. All new technology brings its own politics that shape society. As Marshall McLuhan stated, first we shape technology and than technology shapes us. If some other being from some other planet touched down in Los Angeles, or many other places in America, and wanted to know who was in charge, their first impression might very well be the automobile, and that wouldn't be so wrong. The politics of technology is little commented on and even less understood.

In the last 20 years, networked electronic information technologies have burst onto the scene, and we really have little understanding about their impact. They are rapidly re-writing the rules of commerce, politics, government, and education. Old power structures, institutions, schools of thought, and technologies are grappling to remain in control, trying both to co-opt and stop these forces. One really important issue for democratic society in relation to these new technologies is the question of how information is controlled. An important tool the established powers, our great mega-corporations, are using is copyrights and patents. A dozen or so years ago, Lawrence Lessig wrote some good books on this matter, and started a group called Creative Commons. Lessig spent a few years working in DC trying to help our elected officials understand the importance of these issues and how the powers that be were shaping the laws to protect themselves. A couple years ago, to Lessig's great credit, he quit the charade, and started a new group with Trippi called Change Congress. Their simple message, our politics are broken, and if we don't fix, it doesn't matter what issue you think most important, our government is going to not simply be ineffective, but rigged against you. Lessig has a good piece on our broken politics in the Nation, which I recommend. I will add, it's not just the money in politics and its impact that is the problem, but the same technological forces that Lessig has written about so well impacting copyright and patent law, have also made the idea of 535 people sitting in a building, in the middle of some old swamp, supposedly representing 300 million people, simply incredulous.

Also, The Nation has another good piece by Tom Geoghegan calling for the Dems to let Reps filibuster, good idea. But, I do wish Tom would write about what he knows to be the real problem, not the filibuster, but the Senate, which is the most archaic part of an archaic government structure. We need a lot of new thinking if self-government is going to be a reality in the 21st century. We really should start.

A Tale of Three Cities

It was the best of times, it was the worst of times
it was the age of wisdom, it was the age of foolishness
it was the epoch of belief, it was the epoch of incredulity
it was the season of Light, it was the season of Darkness
it was the spring of hope, it was the winter of despair
-- Charles Dickens

Yesterday, I warned of IMF austerity coming to a government near you, and Colorado Springs makes the point. The Denver Post has a good piece how the notoriously tax-adverse city is cutting not to the bone, but the bone itself:

More than a third of the streetlights in Colorado Springs will go dark Monday. The police helicopters are for sale on the Internet. The city is dumping firefighting jobs, a vice team, burglary investigators, beat cops — dozens of police and fire positions will go unfilled.

The economic philosophy of the last three decades is alive and well in Colorado Springs:

Community business leaders have jumped into the budget debate, some questioning city spending on what they see as "Ferrari"-level benefits for employees and high salaries in middle management. Broadmoor luxury resort chief executive Steve Bartolin wrote an open letter asking why the city spends $89,000 per employee, when his enterprise has a similar number of workers and spends only $24,000 on each.

No doubt we'd all do well on $24,000 a year. But this raises an important question on the growing discrepancy between public employees, who have been shielded from the wage stagnation and benefit cuts of the last decades and the private sector. Of course those who benefited the most from this, not the city employees, but people like Mr. Bartolin will argue time for the public employees to take their cut. However, without a fundamental rethinking of America's political economy, this will in the end lead to nothing but misery. The real question is why the American economy no longer works for the majority, the society as a whole, and how to change that.

Meanwhile over the Rockies and across the Pacific, Andy Xie in Shanghai has an excellent piece about the growing Chinese bubble. The nut:

The U.S. Federal Reserve's low interest rate policy continues to drive money out of dollars and into China-related assets. When inflation forces the Fed to raise interest rates quickly, probably in 2012, this assumption will be tested. In the current speculative game around China, the force is the Fed's zero interest rate.

Blow Ben, blow! Mr. Xie is expecting inflation, but I'm skeptical about that for one important reason. What Alan Greenspan realized before most others is asset inflation by itself, is not inflationary for the rest of the economy. It's tremendously distorting, but not by itself inflationary. The reason for this is the trickle down nature of asset inflation. All dollars are not the same. If you raised wages a hundred percent in a year, that would be inflationary, as the majority of money would immediately be infused into the real economy. Asset bubbles float above the economy, most of the dollars hovering above and a few leaking into the economy, for example when you spend an evening at Mr. Bartolin's resort and tip the servants. What Mr. Xie and many mainstream economists miss is that when the asset bubbles pop, this immediately deflates the economy, all that money is destroyed, or as in our case, remains on the banks books as the living dead, crippling the real economy when the entire financial system is entwined with the bubble.

Now, let's move back across the ocean and the American continent to the world's favorite city, Washington DC, whose bubble never seems to pop. Talk grows amongst our elected representatives just what flavor of IMF austerity will be good for us. Now, we need to pay close attention to this, because this is where we will see clearly defined the fantasy of two parties and the reality of minority rule by our homogeneous one party political class. Case and point is how we talk about the budget. For the political class, Medicare and Social Security are problem one. If you look at the Trustees report, you will see costs of these programs in 2008 at one-trillion dollars. However, the White House's new 2011 budget calls for seven-hundred billion dollars in military spending and with how the budget is accounted this is sorely underestimated. While there will be plenty of talk about cutting Social Security and Medicare, the silence on military spending will be deafening.

Finally, Ed Harrison at Credit Writedowns has a nice piece about the history of military spending and civilizations. In the end, military spending replaces political economy dynamism, and it's down hill from there. We need to fundamentally rethink our political economy. No one can argue there's not waste in government, but it is dwarfed by our asset bubble corporatism. How we change this is fundamental to our democratic future. It is not something the experts who got us into this predicament are going to extricate us from. In another good piece on the dysfunctional nature of our democracy, Robert Reich hits the nail on the head:

But reducing the long-term budget deficit has almost nothing to do with expertise. It’s about our nation's values and priorities. Nothing could be more central to the democratic process.

bonuses, government, and the economy

I can see, I can see when our hands our tied
I was a victim when you lied
Attack
You who smile back legislated
You who made me stupid hatred
Attack
You who used your money taking
You who tax and persecute
You who guarded all the loot
Attack
You who buried me alive
I will survive
Attack, Attack Attack
-- Public Image Ltd.

Well, as you may have heard its bonus season on Wall Street and your money provided to bailout every last one of them is flying out the door. Best is the $100 million for AIG, a company which in just over a year saw $185 billion of your tax dollars go through it. I guess its hard work keeping track of all that money. BofA, which remains on the Fed's low interest and other public largess life support is giving out $4.4 billion. As the economy tanked in 2009, it was good year on Wall Street.

Now we have two cases of looting here, the first is of the taxpayer and the second is of shareholders in public companies. The latter has become an increasing problem as boards have become window dressing and the executives look to see how much money they can squeeze out. Thorstein Veblen, an essential thinker on political economy, spoke of this developing problem, of a rogue executive bureaucracy a hundred years ago, it is now fully manifest.

Meanwhile in the real economy, as 4th quarter results come in, the economy remains flat, all the reason more for those bonuses right? Just like the reasoning for Mr. Bernanke's re-appointment, it could be worse.

Finally, coming soon to a government near you, IMF austerity. In the past, this has been saved for the developing world, let's see how it works with the Greeks.

Come Home, America

Come Home, America. Instead of trying to run the world, let us tend our own wounded society. Let go of inflated claims to global dominance. Instead redeem the fundamental values and sacred principles of the national inheritance. Do not resign from the world. Rejoin on it on more practical and promising terms. -- William Greider

Bill Greider's Come Home, America has been released in paperback. I couldn't recommend it more highly. The book was released last year with little notice and silence from the corporate media. Greider, who worked at the Washington Post for many years and was headed to the front office, abruptly left in 1981 and has since, starting with Secrets of the Temple, wrote a series of book, including Who Will Tell the People, that pulled the curtain from power in America, revealing how things actually operate. Of course such work is essential for any system that proclaims itself "self-government", but the powers that be don't take too kindly to that kind of thing and any perpetrator is internally ostracized -- officially disappeared from the corporate media and sanctioned political dialog.

Greider is one of the vanishing breed of old small "r" republicans. Those who look at this great experiment, the American Republic, with all its great faults and sins, but understands its rare value in Western history. Underlying the entirety of Come Home, America, which is Greider's most appropriately personal book, is the essential understanding that any republic, any system of self-government, can only work with the active participation of the citizenry. Yet, each year we have seen both the growing abdication and forceful removal of the vast majority of the American people from their necessary roles as citizens. People at this point are so disenfranchised, and Greider doesn't ask this, but I think its appropriate, the real political question facing us is "Do you still want this republic?"

If so, Come Home, America is a good place to start. It doesn't provide a list of solutions and talking points, rather, it is a narrative that entwines the complexities facing us including militarism, financial oligarchy, and the environment. The book gives some suggestions for how to start talking about these issues. And make no mistake, that's the first thing that needs to happen if we're going to reclaim this republic, we need to start talking with each other. Not campaigning or sending letters and making phone calls into the great corrupt void that is DC, but talking to each other, so we can come up with what we're going to do to face these challenges. Only when we understand what to do, will we be able to move our government.

This is an especially important point as we watch our electoral process now locked into a death spiral of replacing failed Republican with failed Democrats, then reversing the cycle. The small group of people who are Democratic activists have watched a supposedly imperative, but weak, health care reform dominate politics for six months, suddenly to disappear and now be replaced with a supposedly imperative, but weak, financial reform effort. They will soon be asked to support the reelection of incompetent and corrupt officials espousing failed reform as a campaign platform. This is simply the politics of nihilism.

The only way we're going to change things is to reject this Sisyphean cycle. A great way to start would be to read and get a group of friends to read Come Home, America, and then sit down and ask, "What are we going to do about it?"