iron and oil

FT has some good pieces on how we're now innovating the iron ore markets. It was one of the last commodity hold-outs that now falls into the hands of the traders. After all, you may never know when this year's crop of ore might go bad in the field or something right? Hard to keep steady prices without someone taking a bath with such a perishable commodity, which is why it needs to be trading 24 hours a day. FT writes:

That process reached its conclusion on Tuesday when miners and steelmakers ditched the system of annual contracts and long negotiations that had been in place since the 1960s for new short-term deals based on the spot market.

“This is a momentous occasion,” says Melinda Moore, a commodities analyst at Credit Suisse in London. “The industry is revolutionising the way iron ore is priced.”

The revolution comes as the economic and geopolitical importance of commodities is rising because of the large needs of countries such as China and other developing countries in Asia, the Middle East and Latin America.

The change is not, however, a new phenomenon in commodities markets. Iron ore is simply following other examples, such as the transformation in the crude oil pricing system in the late 1970s, aluminium in the early 1980s and, more recently, thermal coal in the early 2000s.

Yes, another revolution for Wall Street or at least another killing:

Banks and brokers are gearing up to exploit the new iron ore pricing system by developing a multibillion-dollar derivatives market similar to the ones that exist for commodities such as oil, aluminium and coal.

As the 40-year-old pricing system based on annual contracts is replaced with short-term deals linked to the spot market, analysts forecast that the iron ore swaps market will grow to $200bn by 2020 from $300m today.

Why, I bet those derivative markets in oil have been responsible for 2, maybe 3 more barrels of oil over time. Which gets us to Mr. Obama's expected though no less unconscionable decision on offshore oil. The cliff's straight ahead, we just keep barreling forward, foot to the floor.

Krugman as Failure

We were warned the NYT's Nobel Laureate was going to start talking about "financial reform". He's all in today. If you look over Mr. Krugman's blog, he's even reading some things about finance and monetary history. Nothing wrong with that, in fact, it would be good for the country if we all did. However, you think a guy who won a Nobel for economics already knew something about the financial industry, but you'd be thinking wrong.

Mr. Krugman's really fond of little thought experiments, in fact he's gone almost as far to say economics is nothing more, and he'd be right about that. So, let me give you a little tale on how Paul's financial reform advocacy will go:

First few columns: "These bankers are greedy bastards and Wall Street really needs to be fundamentally changed."

Next few columns: "We really need this, this, and this. It's imperative, to do anything else would be a sham on the American people and destructive to the American economy."

Columns once the bill is pretty much intact: "All this is not nearly enough, they didn't do anything, but there's still time to make a couple good changes."

Columns once it's clear even to Mr. Krugman the Democrats are in the tank for Wall Street and nothing good is going to come of it: "Well, this isn't a great bill, but we need to hold our nose and vote for it, to do nothing will be fatal for November."

Column when bill is passed: "This is historic, the Democrats are just great, we can improve it in the future."

OK, so maybe in the past when I've labeled Mr. Krugman a hack, I was a little hard, maybe in the end he's just a good Democrat. After all, there have been no greater advocates of global corporatization and "free trade" than Mr. Krugman and much of the Democratic party. So, maybe the most disconcerting recent babble to emerge from the Nobel Laureate is his advocacy of a 25% "surcharge" on goods imported from China -- the Krugman Tariff. However, Mr. Krugman won't call it a tariff because that flies directly in the face of everything he's been advocating for the past three decades, getting him his prestigious perch at the NYT. I won't say his Nobel, that was for hounding W.

Now, I'd like to direct you to a scathing, sniveling little review, Krugman wrote fifteen years ago on Bill Greider's most excellent "One World Ready or Not". Greider's book documents the ravaging of the American middle-class caused by the processes of corporate globalization. Krugman counters with a ludicrous little tale about hot dogs, and then proceeds to defend it pushing all the pop-economic theory of the day, by so doing, an economist was bestowed with money and pats on the head from the mega-corporate boardrooms, you know, like the money Paul was paid working for Enron. According to the Nobel Laureate, replacing good paying steel jobs with McDonald's jobs was just great. Now today, fifteen years later, Mr. Krugman's contradicting what he's been saying his entire career, while Greider, no back page of the NYT for him, was right along.

Mr. Krugman represents the most serious problem this republic currently faces, power has lost all accountability. From the top of government, to media, to finance, to our large corporations, we've seen spectacular failure, and no one held accountable. It's a lot bigger problem than the fact Paul Krugman is really a very silly man. Instead of reading Krugman, try Greider's Come Home America, it has some actual thought about our predicaments.

locally globally

State and local government budgets are being hammered across the country and much of the response has not been well thought. One of the first things to get quashed has been public transit spending. In a culture that is dangerously dependent on oil and needs to remove itself from that dependency for future economic/environmental vitality, it's just not smart. For example, Santa Monica city council is thinking of doubling the bus price:

Big Blue Bus officials have suggested either doubling the base fare from 75 cents to $1.50 per ride or increasing it to $1.25. The fare increases would generate between $3.4 million and $4.2 million in added revenue for the bus system, which is facing a $7.2 million deficit, according to a City Hall report.

The increases would affect the arrangements that both SMC and UCLA have with the bus system, resulting in about $700,000 in extra expenses for the two schools combined, officials said.

UCLA pays the bus system about $700,000 per year so qualifying students can ride the bus for the discounted rate of 25 cents per ride.

That's just plain stupid. We should be spending money on public transit. Every dollar of public transit debt is a good investment.

In a related matter half-way across the globe, Operation Iraqi Oil(OIO, that's pronounced oyyyy!!) Muqtada al-Sadr, while not gaining the most votes, has proved the biggest winner in the recent elections. Seems one of the things Saddam was doing was under-counting the mass of impoverished Shia growing in Baghdad and other cities. The thing to remember is about four months into the occupation, the US army tried and failed to take out Mr. Sadr, people tend to remember when you try to kill them, some will even hold it against you.

Meanwhile, in the growing warfare of global finance, there seems to be a growing consensus that the Greek solution was no solution at all, just "extend and pretend" on an international level. In one of the funniest things I've read in a long time, Wolfgang Munchau(tx yves) thinks the whole thing's a ruse and advises the Greeks:

Under these circumstances there may come a point when the Greek government concludes that default is the financially superior option, especially since 70 per cent of Greek debt is held by foreigners. If they are smart, they will take the EU money and then default. In any case, default is still the true backstop, not the emergency loan. Bond market investors should be well aware of that...

Ho-Ho-Ho. Take the money and default!? What the hell kind of financial advise is that from a German? No wonder Bill Gross is agitated.

Finally, back to the US, the Post has a piece that old Harry Reid wasn't helped by the health care bill. Harry has 22 people running for his seat, those are Gray Davis recall rebellion numbers. If you're in Vegas and can get the under on Harry's total vote, take it, probably about as sure a thing as there is in November.

What's that song?

I'm in love. What's that song?
I'm in love with that song.
-- Paul Westerberg

One of the great rip-offs in American history was the California restructuring of the electric industry. All told about $80 billion looted, no one went to jail. One of the smaller rip-offs in the larger scheme was the state gave the utilities some tens of millions to explain what the restructuring was about. The utilities deployed one of the most devious PR assaults in history, the message, "It's all so confusing." In that tradition, the NYT magazine has a piece on the financial mess and when you get done, well, it's all so confusin, and really, there's not much of a problem. So, the NYT tries to set the agenda on the upcoming "financial reform" debate, such that it will be.

It's just tiring to read the NYT these days -- the propaganda arm of the political establishment -- they can't even be bothered to couch their misinformation anymore. For example, they label Simon Johnson an outsider, which is pretty good for someone they also note is "former chief economist for the IMF", and is currently a professor at MIT's Sloan School. Now, if in less than two years you can go from being on top of the IMF to an outsider, our political class ostracizes as well as any in the past. Can't wait to see what "historic" financial reform we have coming!

Speaking of "historic" reforms, the Post released a poll showing the Dems got nothing from health care. But, I guess spending the next seven months explaining how it will be implemented over the next couple decades will be the ticket. Good luck with that.

currencies

One thing to keep in mind, what got us to this point did not transpire overnight and it's going to take years to play out. However the sooner we accept things are not going to go back to where they were, the better we will be able to embrace the necessary change, and the better the future.

John Authers has a nice little piece at the FT on the continued sell-off of the Euro caused by the two weeks ago solved Greek Crisis, which turns out, hasn't been solved. Talk grows about bringing in the IMF, which is both a slap to Europe, and America, another bailout courtesy your tax dollars. While Chinese Central Banker Zhu Min states:

Greece "just one case," but also the "tip of the iceberg," and warned that fiscal problems could spread to Spain and Italy. High levels of debt throughout the developed world, he said, would keep growth low for several years.

"The governments tried to put every burden from the financial sector onto their own children. Now they find nobody can save them," he added, referring to the large amounts of government debt issued to fund bank bailouts and stimulus programs in the West during the crisis.

To reinforce, Mr. Zhu's sentiments, Ben Bernanke was before Congress once again assuring everyone who will listen that Fed rates will be low for a very, very long time. However, in the next couple weeks the Fed will end one of the greatest props to the housing market, their buying mortgage back securities to the tune of 1.3 trillion dollars in total. We'll see how that works.

Meanwhile, Bill Gross is about a week early in his monthly perspective and sounds a little agitated. If you're king of the bonds and sovereign debt is becoming increasingly risky, where do you go? Mr. Gross takes a swipe at the CBO's numbers on the recently past health care bill, saying far from saving $138 billion, it's going to increase the debt by $562 billion. Like I said, he's agitated.

Well plenty of money to be made in this volatility if you're the gambling sort. But remember, Mr. Keynes lost almost everything speculating on commodities and currencies in 1929. His mistake, "I was forgetting gold is a fetish." Revenge of the gold bugs? Lord help us all.

global political economy

Are you accomplices in the current folly of the nations -- the folly of wanting above all to produce as much as possible and to become as rich as possible? What you ought to do, rather, is to hold up to the the counter-reckoning: how great a sum of inner value is thrown away in pursuit of this external goal! But where is your inner value if you no longer know what it is to breathe freely? if you no longer possess the slightest power over yourselves? if you all too often grow weary of yourselves like a drink that has been left too long standing? if you pay heed to the newspapers and look askance at your wealthy neighbor, made covetous by the rapid rise and fall of power, money and opinions? if you no longer believe in philosophy that wears rags, in the free heartedness of him without needs? if voluntary poverty and freedom from profession and marriage, such as would very well suit the more spiritual among you, have become to you things to laugh at? If, on the other hand, you have always in your ears the flutings of the Socialist pied-pipers whose design is to enflame you with wild hopes? which bid you to be prepared and nothing further, prepared day upon day, so that you wait and wait for something to happen from outside and in all other respects go on living as you have always lived -- until this waiting turns to hunger and thirst and fever and madness, and at last the day of the bestia trumphans dawns in its glory? -- Daybreak, F. Nietzsche

Stratfor Global Intelligence offers their members insights into global happenings. Their website states "members include individuals, FORTUNE 100 corporations, government agencies and other organizations around the world" -- heavy hitters in the global game. Yves Smith put a few paragraphs of Stratfor's thinking in a recent piece which is very much worth reading. Stratfor says:

One of the leading reasons the world has been so stable is because the traditional merchant powers have had a deep market to sell into: the United States. Part of the peace accords and reconstruction of Japan included granting it full access to the U.S. market as well as full American protection of Japanese trade lines. Part of the peace accords and reconstruction of Germany included a similar arrangement. These arrangements proved so successful in containing Japanese and German imperial ambitions, revitalizing and enriching their economies, and giving them a powerful incentive to be part of the U.S. alliance structure that the pattern was repeated throughout Western Europe, in Taiwan and Korea, and to a lesser degree in Indonesia and elsewhere.

By granting these states privileged access to the American market — and not necessarily demanding American access to their markets in return — the United States created conditions extremely favorable for its allies’ economic development and prosperity. “All” it asked for in return was the right to determine military strategy, ultimately creating a global alliance network that served American interests. The United States traded some market share to turn adversaries into allies, both reducing the number of foes and intimidating the remainder by the sheer size of the U.S. alliance structure. As a result, some of the world’s most aggressive mercantile powers became placid. They no longer had to go to war for access to resources or markets.

This entire arrangement, however, rested on the basis that the United States generally did not use the full force of its state power in pursuit of its singular economic ends. The United States was content to buy others’ goods and run trade deficits to command the loyalty of its allies in security matters. The question with the Obama administration’s export strategy is whether it marks a change from this mode. To increase exports, one has to increase penetration into foreign economies, and a number of countries’ economies and social systems only work the way they do because they have taken shape with minimal outside pressure — i.e., minimal competition from the United States. This is not to say that many countries do not already perceive the U.S. presence as overbearing, but rather that the United States simply has not spent much energy in competing for foreign market share over the past half century. If it suddenly exerts itself in opening up the doors of trade around the world — and doubling U.S. exports would mean finding buyers for an additional $1.5 trillion dollars worth of goods — it will disrupt a lot of places.

We are not saying that the Obama administration’s export strategy is good, bad, wise, unwise, feasible, unfeasible or anything else. It simply raises the question of whether it is a coincidence that when the dominant global power did not use state power to seek foreign markets, the degree of competition and ultimately violence among players on the international stage was markedly lower than in previous periods. If not a coincidence, then the full weight of the American nation behind a strategy of maximizing exports could have massive unintended consequences.

Now, Stratfor could very much be talking their book here. If they get most of their money from Fortune 100 companies, no one is going to be hurt more if the planet's nations go into a full scale trade war, though few tears will be shed for the Fortune 100. However, there's two important points here I've been harping on for an extended time. First, the world is not going to export and devalue their way out of the financial mess.

The second point is more important. The financial crisis is at root a symptom of the increasingly unstable post-WWII Pax Americana. The United States, the world's greatest debtor, can no longer play the role we've played in global political economy for the past seventy years. We must begin to consume less, produce more of what we consume, transcend our oil addiction, and close the military-bases we have around the globe, cutting the military budget by at least half. That's necessary economic reform for America.

Now this transition is going to take years and it has already begun. It will be a challenge not just for the United States, but for the world, and no matter how challenging it becomes, if we can avoid more wars, the earth will come out ahead. To understand just how tricky this is going to be lets look at the Euro. The creation of the Euro was a direct and healthy challenge to the Pax Americana, however only 15 years old, the Euro is facing an existential crisis. As worries on the Euro grow, we see much of the world retreat to the safe-haven of the dollar, making amongst other things, US export plans problematic. But the problem of the Euro is very much the problem of the dollar, and the problem of the dollar is very much the problem of the renminbi. That is, we are all in this together. Tremendous imbalances in the global economy have risen over the past several decades, they will take years to work out. The thinking and people that brought the world here, are not going to be the people and thinking that get us out.

The Great Contradiction of American Politics

Bloomberg has released a poll(tx yves) with the headline "Wall Street Depised in Poll Showing Most Want Regulation". It is very interesting to say the least. Some of the highlights:

• Most people interviewed in the Bloomberg National Poll say they don’t like Wall Street, banks or insurance companies and favor letting the government punish bankers who helped cause the worst financial crisis since the Great Depression.
  
• 57 percent of Americans have a mostly unfavorable or very unfavorable view of Wall Street.
• Banks are viewed badly by 54 percent of poll respondents.
• 60 percent have a negative opinion of insurance companies.
• The majority of poll participants -- 56 percent -- say big financial companies are more interested in enriching themselves at the expense of ordinary people.

Fairly substantial numbers against the ruling doctrines and institutions of the past thirty years. However, there' a catch:

• Almost seven out of 10 people surveyed support using current bank regulators for consumer protection, backing positions held by the financial industry and Republicans over President Barack Obama's proposal to establish an independent agency.
• More than 40 percent of Americans say the government has gone too far in measures to fix the financial industry; 37 percent say it hasn’t done enough.
• “Anything the government gets their fingers in, they mess it up,” said poll participant Norman White, 60, a community college electronics instructor who lives in Colfax, Lousinia. “I don’t have a very high opinion of the government running anything.

What this poll reveals is the great contradiction of American politics. We are at the end of the Reagan Revolution, the great reactionary movement of American politics against the New Deal and "big government." The heroes and myths of the era, such as Wall Street and "free markets", lay shattered on the ground. But just as importantly, the distrust of government, not only in this poll, but all polls, is at record levels. Thus, simply mouthing platitudes from 70 years ago or trying to instill faith back in government with massive bills filled with subsidies for mega-corporations isn't going to get you far.

The poll also shows most Americans don’t like the nation’s top corporate bosses. Almost two-thirds say they have an unfavorable opinion of business executives, a rating that rivals the public’s disdain for Congress, which was viewed with disfavor by 67 percent of respondents.

Having followed this issue for a long time, neither of these numbers are new, however they are historically high. The question of whether large corporations have too much power in this country has been at or above 70% for a couple decades, in fact, the power of giant corporations has always been an issue since their inception a century and half ago. But today, with both parties in the pockets of the mega-corporations, it is never realized as an issue. Nonetheless, this is the sweet spot of American politics at this point, yet one party will insist on helping the corporations and eventually you through more centralized government, while the other will continue their bankrupt philosophy of laissez faire, thus, political advantage to neither.

What we need is to revive and evolve the principles and institutions of this republic, understanding the people are sovereign. We need to revive the imperative of self-government, now lost to history, that if we are to have democracy, it must be decentralized. If we advocate the use of government, we must first revive its legitimacy, and the only way that is going to be done is by bringing the American people back into politics and into the decision making processes of government.

cars, google, and china

The county of Los Angeles has ten million people, the most populous in the nation. LA developed with the automobile. Much of the time, it is a transportation nightmare, both so massively inefficient and plain inhuman it boggles the mind. Yet the automobile, barely a century old, remains the ultimate symbol of "freedom" for modern America. At this point, reality couldn't be further from the truth. The LAT has an good piece on LA transportation and the price of freedom:

Los Angeles marked Transportation Freedom Day last week. What's that? It's the day when the typical median-income family has earned enough money to cover transportation costs for the entire year.

Your basic middle-class L.A. household spends about $8,600 a year on gas, insurance, parking and vehicle maintenance, according to the California Public Interest Research Group, a watchdog organization.

That compares with about $8,000 for the average U.S. family and represents more than 20% of most people's annual expenditures.

Ten weeks of work a year just to pay the oil, automobile, and insurance industries -- freedom indeed! I did a rough calculation, far good enough for energy numbers, an industry whose numbers make Wall Street's accounting look rigorous, at $3 a gallon, the county of LA sends fifteen billion dollars a year straight out of the local economy simply for the cost of oil. Call it an oil industry tax. In fits and pieces, LA has attempted to do public transit, but the only thing worse than sitting in a car in the middle of LA traffic is sitting on a bus. Mr. Lazarus writes,

My car was in the shop last week, and I rode public transit around town. I don't mind going by bus or rail -- it's a nice change from playing road warrior. In fact, I'd willingly ride public transportation every day if the system were more user-friendly.

But it's not. And it's almost as if the dozens of entities that constitute the region's public-transit network are conspiring to make the system as unwelcoming as possible.

Now this is an important point, because government has actively subsidized automobile usage in this country for a century. Los Angeles County has 88 local municipal governments to coordinate, making any reasonable transit plan a challenge. But an important question is instead of what would traditionally be the solution of placing power into some over-all central authority, how instead can we get these entities working together in some sort of distributed networked system. Doing so will be a fundamental element of reforming and evolving self-government for the 21st century. Open architecture, open standards and cooperative integration, three elements of the still young internet era can be important components in evolving LA transit.

Which brings us to Google and their fight with China. Now to this point, Google has been co-operating with Chinese censorship, so congrats are not necessarily in order. And as this article points out, it's as much, if not more, a business decision than any political stand. It's timing is a little interesting in regards to the brewing trade war. The creation and growth of Google is an amazing story. They've used many of the principles of open architecture, open standards and cooperative integration that has made the Net the revolutionary medium it is. But, it also raises serious questions on the control of information and how we evolve our political economy for the 21st century. The questions put forth by the Net are as important to the future of self-government as those posed by industrialization were at the beginning of the 20th century. The forces of self-government were not well matched to the forces of industrialization. We need to do better this time.

This is one amazing chart(click for larger, tx jesse), showing the drowning of the US economy in debt with the ascendancy of Wall Street. What's most interesting is in the last 25 years as debt's been piled on thick, inflation has remained limited. I need to check my Econ 101 text book, this just don't seem right? We're getting to the point where a dollar of debt brings about less than a dollar of economic activity, also known as indentured servitude -- that is of the republic to Wall Street.

Meanwhile, Wolfgang Munchau over in the FT, not prone to hyperbole, sees the end of the EU as we know it, stating:

I am not predicting a catastrophe. I am merely pointing out that the present policy choices are inconsistent with the survival of the eurozone in its current form.

Blame it on the Germans, and why not? You can't blame it on the Greeks, they haven't been in charge for over two-thousand years. You could blame it on the Brits, after all, it will take another several centuries for the world to recover from that rotten bloody empire, but they stayed out of the monetary union, and even if they were in, they'd just be the Greeks with bad weather and worse food. As the French say, C' est la vie. Look at it another way, from Orson Welles in "The Third Man":

After all, its not that awful. In Italy for thirty years under the Borgias, they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love, and five hundred years of democracy and peace. And what did that produce? The cuckoo clock.

by any means necessary

Usually when people are sad, they don't do anything. They just cry over their condition. But when they get angry, they bring about a change.
-- Malcolm X

What happens when it isn't the people in the streets, but the government itself that adopts the policy of "by any means necessary?" This week marked the seventh anniversary of America's occupation of Iraq, the war having started in 1991 soon enters its 20th year. We had three administrations that cajoled, manipulated, and lied to the American people on starting the war and then launching the occupation. The last two administrations have now codified torture as legitimate policy -- by any means necessary.

In financial affairs, with the collapse of Lehman, it has now been revealed the government aided and abetted the breaking of financial laws. Now, the latest revelation of our government adopting the policy of "by any means necessary" comes from the former Treasury Secretary Hank Paulson. The NYT review of Hank Paulson's new book reveals:

Early on, when Paulson wanted to seek broader powers through legislation, Frank cautioned that he didn’t have the votes but urged him to interpret his existing powers broadly. “I’m not going to raise legal issues,” Frank assured him.

By any means necessary, right Barney? What happens in a society where the government sets the example of by any means necessary? A long time ago Hosea answered, "They have sown the wind, and they shall reap the whirlwind."

baseball begins early

Morgan Stanley's Stephen Roach has written for years on the problems of global debt. Yesterday, he offered the soundest public policy advise in years. Roach states, “We should take out the baseball bat on Paul Krugman -- I mean I think that the advice is completely wrong.” Ho-Ho-Ho, I may yet have a career in high finance! Roach is reacting to Krugman's call for appreciating the Chinese yuan in an attempt to alleviate the problems caused by the corporate globalization scheme of the last several decades, for which there was no greater advocate than Mr. Krugman. The only thing I could add is why stop there, might as well continue swinging across the halls of the NYT.

Mr. Krugman is a prime example of the insolvency of our political economy. The distance between Mr. Krugman and Alan Greenspan is so small you'd have a hard time slipping a sheet of paper between them. Mr. Krugman became the darling of the Democratic opposition, winning his Nobel prize not for his economic thinking, but for pillorying our last hapless president, Mr. Bush. As the front page of the NYT helped lead this country into the most disastrous war in history, screaming the garbage of Ms. Miller and the propaganda of Iraq WMDs across the front page, the NYT's publishers, realizing most of its readers were against the war, allowed Mr. Krugman to blather away on the back page. "You tell 'em Paul!" Now, the Democratic faithful think Mr. Krugman is on their side, though he advocated for decades the dismantling of the American industrial base.

China is one of the great civilizations of human history. They unfortunately, and very much to their own detriment, bought the corporate globalization game hook, line, and sinker. The WSJ(tx yves) has an interesting piece stating:

Vice Commerce Minister Zhong Shan, in an exclusive interview Thursday ahead of a visit to the U.S., said that the profit margin on many Chinese export goods was less than 2%.

Most exporters absorbed the appreciation in the value of the yuan that followed its revaluation in 2005 by boosting innovation and cutting costs, but many were forced to close, he said. A further rise in the currency’s value would endanger more exporters’ survival, which China can’t afford, he said.

How close this is to reality, hard to say, but there definitely is some truth in it. The appreciation of the yuan would cause great problems for the Chinese. It also flies in the face of any historical context. In the 1930s, the US was very much in the position of the Chinese today. We devalued the dollar. FDR spent three months at breakfast randomly choosing the price of gold against the dollar. One morning, he increased it by 21 cents, stating it was a lucky number. FDR didn't have much respect for the lords of finance or the economic priesthood. Over the course of several months, he devalued the dollar by 40%.

The world is a far different place than it was in the 1930s. We are in the midst of the collapse of the great corporate globalization experiment of the last three decades, which was an American led endeavor. The Chinese are dependent as us on a global system held together by the world's greatest debtor. This is a situation which is unsustainable, meaning, it will not be sustained. China is far weaker than many believe, and their history of the last two centuries shows in times of foreign induced troubles, they tend to turn on themselves as opposed to lashing out. That is something no human being should wish on any other people. Our political economy is bereft of necessary new thinking, events are in the saddle.

morituri te salutant

Looks like a full scale trade war is heating up. Reuters reports:

On Monday, 130 members of Congress urged the Obama administration in a letter to label China a currency manipulator and take other steps to persuade China to raise the value of its currency against the dollar.

If currency manipulation is a crime, where go Mr. Bernanke and Mr. Geithner? Or for that matter Mr. Krugman, who remember won his Nobel on the benefits of trade for all, and his position at the New York Times for his full throated advocacy of corporate globalization. That doesn't stop Mr. Krugman from lashing out at the Chinese in his latest shill. Gee Paul, are you saying it wasn't such a good idea to dismantle all that American industry and send it to China? Can you really, no matter where your currency is pegged, expect people making $20 a hour to compete against people making 50 cents? Oh, that's right Americans need to learn how to compete, haven't we been heard that ad nausea from our meeska mouska free marketeers for decades now as jobs and wages were slashed. An interesting point, Mr. Krugman seems to be making a case that current account balances matter and if current account balances matter, you wouldn't be implying deficits matter would you Paul? Phew, it is all so confusin understandin the thinkin of the upper echelons.

Much better is Andy Xie piece, Our Next Economic Plague: Japanese Disease(tx yves). Xie's piece explores the now twenty year "stagnation" in the Japanese economy. It's a good piece on the question of what I've been calling older industrial economies. The simple fact is that China, India, Africa and the rest of the "developing" world are going to grow at faster rates than us, Europe and Japan. The Chinese really don't need to be exporting much of anything. We need some fundamental rethinking on the future of the American economy, Mr. Krugman, for one, has little to offer.

a spine evolves in Washington

Mr. President, last week’s revelations about Lehman Brothers reinforce what I’ve been saying for some time. The folly of radical deregulation has given us financial institutions that are too big to fail, too big to manage, and too big to regulate. If we have any hope of returning the rule of law to Wall Street, we need regulatory reform that the addresses this central reality. As I said more than a year ago: " At the end of the day, this is a test of whether we have one justice system in this country or two. If we don’t treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole 500 dollars from a cash register, then how can we expect our citizens to have faith in the rule of law? For our economy to work for all Americans, investors must have confidence in the honest and open functioning of our financial markets. Our markets can only flourish when Americans again trust that they are fair, transparent, and accountable to the laws." -- Senator Ted Kaufman

Three cheers to Senator Kaufman, you can and should read the whole speech.(tx zh). What we need to understand is that much of the financial innovation of the past decades was fraudulent, allowing simple manipulation at a massive scale. Bill Black and Eliot Spitzer have an excellent piece at New Deal 2.0 calling for congressional investigations, this has to be done. Any so-called financial reform, without extensive background to what was done, is simply a charade, but DC's very good at that these days.

Zero Hedge also has a very good piece on securitization, particularly mortgage CD0s, writing, "But even smart people can be fooled by CDO terminology, which is Orwellian by design." It's a good take on how Michael Lewis, who in the past has written some excellent pieces on Wall Street, completely missed the plot in his newest book. Lewis praises a handful of traders who were shorting(betting against) all the debt dreck. What Lewis misses, shorting was a big part of the game. Firms such as Goldman were knowingly peddling garbage to their customers with one hand and shorting with the other. Of course, it took the AIG and the rest of the bailouts to make their bets good. Yves Smith has a very important piece on this coming shortly.

All this begs the question, how much fraud was involved -- the short answer a lot. If much of the debt was fraudulent, let's declare it null and void, starting with what's on the books at the Fed, Fannie and Freddie. That will help the deficit. What say you Mr. Gross?(tx ames)

Lehman as Enron 2.0

Taking out a policy for love and destruction
Can't operate with this vexation
Say it again, real real gone
I know I've copped but I'm not the only one.
I steal what I have
-- Copped It

If you have a society where it becomes foolish not to steal, then only fools don't steal, and that society has not much of a future. The bankruptcy examiner's report on Lehman reveals the fraud behind too much that goes for business on Wall Street. The fact is nothing really is new, many of the transactions were exactly what Enron "innovated", validated by a major accounting firm with the active collusion of Tim Geithner's NY Fed.

The only question, when is someone going to jail? Begging the question, when is our government going to do something? Of course, when you have a Congress that has been bought and sold five times over, one shouldn't hold their breath. Talk of financial reform out of the Congress makes health care reform look like Public Citizen good government. How can you have any take on financial reform when you have no idea about what occurred, well if you're in Congress you let Wall Street write the laws, then you don't have to know.

The Journal has a good piece on the scam, along with the FT. Yves Smith is on BNN here about Geithner NY Fed's culpability. And Eliot Spitzer was on Dylan Ratigan here(tx zh):

Ratigan:

This report comes just short of suggesting this is by no means an accident but instead one of the greatest crimes ever perpetrated by a group of people, and enabled by the US government.

Spitzer:

There is no doubt civil cases will be brought. We had a failure of CEO, the CFO, the accountants, and indeed the regulators, the Fed and the Treasury, that were inside these banks, and the question has to be asked: where were they.

The question to the former NY AG, who by the way was the only elected official in this whole damned country taking on the financial industry back when they were all being celebrated as masters of the universe, but the question, what about criminal cases? And remember fellow taxpayers, it's all your money in the amount of trillions that that has been poured in to paper over the still existing mess, and if we don't hold our government officials accountable, that pretty much makes us all unindicted co-conspirators to our own looting -- Hey, Hey, Hey, Hey.

dem dems

Pat Caddell has a piece in the Post no less. The times they are a changing. Scaring Democrats isn't hard, I mean this is a party despite having the presidency and both houses of Congress still quivers and shakes at the utterances of Dick Cheney. However, this piece goes into deeper and troubling problems of government legitimacy. Pat states the Democratic obsession with passing a not wildly popular health care bill equates with the classic miscues of history Barbara Tuchman describes in March of Folly:

In "The March of Folly," Barbara Tuchman asked, "Why do holders of high office so often act contrary to the way reason points and enlightened self-interest suggests?" Her assessment of self-deception -- "acting according to wish while not allowing oneself to be deflected by the facts."

He then adds:

Their blind persistence in the face of reality threatens to turn this political march of folly into an electoral rout in November....it already faces the prospect of losing 30 or more House seats and eight or more Senate seats.

I would suggest those are pretty conservative numbers. The biggest problem is the Democratic health plan has lost a lot of support amongst Independents and that's the ball game. As Pat states, at this point Dems are damned if they do and damned if they don't, but I have to say passing a bill the majority of which isn't enacted for years, and then running on it for five months telling people how great is, doesn't seem like much of a strategy.

Further in the piece are the real problem numbers for not only the Democrats, but for all of us:

CNN found last month that 56 percent of Americans believe that the government has become so powerful it constitutes an immediate threat to the freedom and rights of citizens. When only 21 percent of Americans say that Washington operates with the consent of the governed, as was also reported last month, we face an alarming crisis.

If you're a party that advocates the use of government and the majority have lost faith in the government you have a problem. Now, Democrats will whine that it's all the "crazy conservatives", but it's deeper than that. Remember the president ran for two years railing against a broken DC in the control of "special interests" and permeated with a culture of corruption. I'll repeat again, the Democrats made their biggest mistake by not taking on Wall Street and the banks in the spring of 09, which would have helped legitimize everything done after, but when you have folks like Rahm, Summers, and Mr. Geithner, all flacks of the financial industry, the very personifications of what's wrong in DC, you're finished before you start.

Completely related is Yves Smith excellent piece on Lehman and Geithner. Let's understand the great deal of fraud that was committed during the last twenty years and how absolutely nothing has been done, no investigations, no one to jail. The latest news is Lehman was cooking its books to the tune of almost a quarter of their balance sheet, with the collusion of both its accountants and the New York Fed under Mr. Geithner. So, when you have the government conspiring with our financial oligarchy to cook their books, how in the hell should any American believe any numbers coming out of DC?

As far as numbers for November, there's one supreme, unemployment, and if it's where it's at now, call it a Democratic Waterloo. The Democrats place their hopes on that passing health care will show they're do something and the business cycle. As Count Floyd used to say, "Ooooooo, pretty scary eh kids?"

on debt and a new world

The question I have for the folks at PIMCO is what sort of haircut would you find acceptable?

Bill Gross' partner at PIMCO, Mohammed El-Erian has a piece in the FT which should be read. It provokes thought, and most important, this is the voice of the bond kingdom. They are united in one thing, the debt they hold is made good. After all, that is how the game works, but I'd suggest the bond kingdom has some responsibility for the ocean of garbage debt the world has been flooded with over the past couple decades, thus a responsibility beyond recommendations on how to insure they're paid.

Mr. El-Erain states, and he's right, the Panic of 2008 created a sea change, and no one really yet understands what this means. He suggests:

Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily – and excessively – through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects.

He then adds:

The shock to public finances is undermining the analytical relevance of conventional classifications. Consider the old notion of a big divide between advanced and emerging economies. A growing number of the former now have significantly poorer economic and financial prospects, and greater vulnerabilities, than a growing number of the latter.

These ideas are important for several reasons. First, this isn't a situation that developed in the last two years. It has taken several decades to get here. Second, what Mr. El-Erian is describing is the process of corporate globalization, specifically, its impact on older industrial economies. The win-win-win notion of corporate globalization has always been the most vile of propaganda. 6.5 billion people on this planet cannot live like 300 million uber-consumptive Americans. It is physically impossible.

Over the past decades, growth in the "developing" world has in many instances been at the cost of the "developed" world. This fact has been literally papered-over with debt. The United States is the best and shiniest example of the creation of historic levels of pubic and private debt to obscure the impact of corporate globalization. Of course, it's important to understand this corporate model was built atop a five-centuries old model of European/American global domination. If you have any sense of fairness, that situation could not be defended. You cannot, except at the point of a gun, ask the vast majority of people in the world to be economically subservient to the few.

Mr El-Erian points out it's ridiculous to look at the global economy and suggest one size fits all. The old industrial nations of Europe, the US, and Japan do not need the kind of growth of China, India, Africa, or Brazil. At the same time, the model of modernity of the United States and to a lesser extent Europe is simply not transferable to the other six billion people on this planet. We all need to rethink how and for what our economies function.

Mr. El-Erian writes the world is birthing a new era:

We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena.

I couldn't be in more agreement. The question is what are these new "systemic phenomena. Mr. El-Erain then writes:

Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments.

Compare this to what Keynes wrote in his Treatise on Money:

I think it is desirable that the obligations arising out of past borrowing, of which National Debts are the most important, should, as time goes on, gradually command less and less of human effort and of the results of human effort; that progress should loosen the grip of the dead hand; that the dead hand should not be allowed to grasp the fruits of improvement long after the live body which once directed it has passed away.

Compare both with Thomas Jefferson's thinking on the matter in a letter to James Madison:

The question Whether one generation of men has a right to bind another...is a question of such consequences as not only to merit decision, but place also, among the fundamental principles of every government...I set out on this ground which I suppose to be self evident, "_that the earth belongs in usufruct to the living_;" that the dead have neither powers nor rights over it.

The received opinion, (is) the public debts of one generation devolve on the next. ...but between society and society, or generation and generation there is no municipal obligation, no umpire but the law of nature. We seem not to have perceived that, by the law of nature, one generation is to another as one independant nation to another.

But with respect to future debts; would it not be wise and just for that nation to declare in the constitution they are forming that neither the legislature, nor the nation itself can validly contract more debt, than they may pay within their own age, or within the term of 19 years? And that all future contracts shall be deemed void as to what shall remain unpaid at the end of 19 years from their date? This would put the lenders, and the borrowers also, on their guard. By reducing too the faculty of borrowing within its natural limits, it would bridle the spirit of war, to which too free a course has been procured by the inattention of money lenders to this law of nature, that succeeding generations are not responsible for the preceding.

It is quite incorrigible for one generation to bind the next with their debts. As Mr. El-Erian suggests, we are in a new era, it would be despicable via massive debt to chain it to the past. We need to destruct a great deal of this debt, and it must be done to free the future. The future must be allowed to find their own way. The dead hand of the past through gross negligence has lost moral, and, one can add, fiscal authority.

Finally, Voxeu has an argument(tx yves) for not just accepting the debt, but piling more on. The author writes:

In the UK between 1918 and 1932 debt increased from 121% of GNP to 191%. It was not until 1960 that debt returned to its 1918 level.

Proving once again, economists for the most part do not make good historians. Besides a few years in the 1920s, the British economy over most of that period was awful. You want to propose the first fifteen years of post-WWII Britain as an economic model to aspire? No thanks! As far as how economies deal with debt, a much better model might be the Germans in the 1920s. Leaving aside the always popularly noted couple years of hyper-inflation, the debt crippled the economy for well over a decade and half, creating one of the greatest reactionary tragedies of human history. As Jefferson noted, national debt and war go hand in hand. We don't need stagnation or war, we need to revitalize our economy, but it needs to be a vastly different model than the past fifty years.

So, what say you Mr. Gross and Mr. El-Erian? How about a little public service? Explain what sort of haircut you'd be willing to take to help right the ships of state on this sea of change we all are embarking.

remake/remodel

I tried but I could not find a way
Looking back all I did was look away
Next time is the best time we all know
But if there is no next time where to go?
-- RM

The first rule of bubbleology is, you don't know when they will pop, and in fact, they can expand a lot longer than you think. Or as Mr. Keynes said, markets can stay irrational a lot longer than you can stay solvent. The second rule of bubbleology is -- bubbles always pop. In the last year, we've watched as "man of the year" Mr Bernanke flooded the world with liquidity and it has had an impact, most importantly "inflating" global currency markets, what that means over time, well, we'll see. Doug Noland is a bubbleologist extraordinaire, he writes at the Asia Times:

The markets' perception of "too big to fail" has for years been an integral facet of bubble dynamics. And despite all the talk of trying to rid the marketplace of this notion, the markets remain more persuaded than ever: the unfolding global government finance bubble is much too gigantic for policymakers to risk letting it come anywhere close to failing.

So, the real question is how long policymakers can keep things afloat. In the end, that depends on the real economy, and looking at that has become a Rorschach test, unless you're unemployed, it just looks one way, pretty shitty. It certainly seems deflationary trends are fairly entrenched. The most recent inventory numbers in the US show they remain down a whopping 10% from last year. While the FT reports regulators are telling US banks to hold onto their money "until political and economic uncertainty surrounding the industry dissipates."

Over in Europe, the roulette wheel turns to see which sovereign debt problem makes it to the front page next -- Portugal, Spain, Italy, the Brits, or back on red with the Greeks once more? Ed Harrison has good piece on the not looking too good European economy. Can everyone really export and devalue their way out of this mess?

There is one bright spot and that is Asia. And China is moving, but where? The problem with command and control economies is they push on the thing that is working until it doesn't work anymore, and then there's great problems. The FT reports the Chinese are indeed exporting and certainly from last year's cratered numbers things look better, but in the last paragraph the FT notes:

The “new export orders” component of China’s official PMI fell from 53.2 in January to 50.3 in February, while the import component dropped from 53.4 to 49.1. The PMI readings are forward looking and a level above 50 indicates expansion while a level below 50 indicates contraction.

Bubbles, Bubbles, Toils, and Troubles

John Authers has a nice little piece at the FT marking the 10th Anniversary of NASDAQ peak, yahoo, or should I say pets.com, those were the days. Authers shows the charts on how when a bubble pops, it's many years before things recover. For example, ten years on, the NASDAQ has barely and briefly seen half its high, while the Japanese Nikkei is just above a quarter of the value it reached at its peak 20 years ago. Don't count on seeing any new housing highs for a very long time.

Authers makes a most important point on leverage, it is a serious aspect of many bubbles, and nothing helps leverage like low interest rates. Mr. Bernanke has done everything he can and the results of what he's done, they won't be good, will take years to play out. Auther's writes:

The past decade was driven by leveraged investors. Those low interest rates made it far cheaper for investors such as hedge funds to magnify their returns with leverage. Thus they came to drive the market.

They were helped by another artefact of the dotcom crash. Mutual funds (and the portfolios of the new breed of day traders) crashed with the Nasdaq. Hedge funds, able to sell short and to switch between asset classes, were able to make money during the years of the dotcom bust. That in turn attracted huge new flows from institutions, who are as prone to chase performance as anyone else.

As a result, many of the technical and leverage-driven strategies used by hedge funds, and by banks’ proprietary trading operations, became top-heavy. Far too much money was thrown at structured credit investments, or at emerging markets’ currencies.

We all now know the consequences. A decade on, they are the consequences of the Nasdaq boom.

At some point, we're going to have to reboot the monetary system.

Shorting America

Ain't that a kick in the head.
-- Dean "Dino" Martin

The FT has an Op/Ed by Dino Kos about shorting(betting against) US Treasuries. Mr. Kos asks, "Should traders and investors short the US Treasury market?" He briefly lays out the pro-case, but then spends the rest of the article making the con-case, concluding the time's not yet right, at least as Dino states in "the medium term." And for Dino, the medium term is the "next several quarters." Webster defines several as, "more than two but fewer than many." So, lets say Dino's giving us three or four quarters, Phew, being able to rely on stable money for only three or four quarters ain't much of a way to run a railroad, or country for that matter, nonetheless.

So why does Dino, get to speculate on US creditworthiness in the FT? Well, he worked for the Fed, the Reserve Bank of New York no less. In fact, his resume shows he went to work for the Fed in 1985, that would be right before the Fed's salad days and the splendorous papal reign of Mr. Greenspan. Dino's bio shows a curios timing, he left the Fed in the summer of '07, right when things began to get interesting. When he left, Dino was the Executive Vice President of the Market Groups with "responsibility for all the trading activity of the Federal Reserve including repo, government securities, foreign exchange and foreign reserves management." Upon his hiring in '07, Morgan Stanley stated, “Dino’s extensive experience in this market, combined with his proven leadership abilities, will enable him to make a significant contribution to the growth of our business as we further develop our Central Bank and Sovereign Wealth Fund capabilities."

Now today, Dino opines on US creditworthiness and the dollar, one would certainly want to know what his thoughts on the matter were in 2007. Did he flee the Fed cause he was worried about the future workload? Remember, when Dino left the Fed their balance sheet was at $800 billion, a little over a year later it would be over two-trillion! Since Dino left, they've been some trading S-O-Bs down there at the Fed. Or was he just leaving in that grand American Wall Street tradition of cashing in on his years of public service? Whatever the case, his tenure at MS wasn't long and now he's an analysis at Portales Partners, which doesn't seem as heady as Managing Director and Head of Central Banks and Sovereign Wealth Funds at Morgan Stanley.

I don't mean to be picking on Dino personally here, he's probably a swell guy, but we need to understand the background of the folks out there these days putting the dollar and other global currencies into play. How do you run a country in any long term capacity if you can't have stable money supply? We've been in Afghanistan and Iraq for almost ten years now, how do you run a war if you can't rely on stable money? Or better, how do you build energy or transportation infrastructure? How do you listen to a guy who was at the Fed when policies were predominately for the overwhelming benefit of quarterly Wall Street profits, undermining the long term sustainability of the American economy?

liberalism

Michael Sandel has a short, but excellent, post on liberalism. He gives a brief history of liberalism in the 20th century, though leaving out the story of its abandonment by many after its association with Michael Dukakis in 1988. However, the most important shift in the definition of liberalism occurred in the 1930s. The New Deal reforms abandoned one of the most important tenets of the American system, the Jeffersonian principle that democracy was inherently decentralized. Sandel suggests, and I think quite rightly, we must re-embrace this principle if we are to effect reform of our political economy.

With the growth in power of the major industrial corporations at the turn of the 19th and 20th centuries, a major liberal/progressive response was to break them up. Louis Brandeis became a major advocate of bringing Jefferson's 18th century thinking on the undemocratic nature of concentrated power into the 20th century. Brandeis referred to it as "the curse of bigness". Anti-trust, the breaking up of the new corporate structures, never gained much power, but as Sandel points out, after a brief flirtation, the New Deal abandoned anti-trust and what emerged was a hybrid-balance between, big government, big labor, and big corporations. Over the years, big corporations took over big government, destroying big labor. Today's liberals cling to the notion that somehow they are going to get bigness to work.

One of the reasons our American politics and government is dysfunctional is because power was never meant to be so concentrated. Power from the beginning was checked and balanced, separated, and distributed not just in the three branches of the federal level, but also from the federal level with power in the states, and separated and balanced from the states with power in the counties and local governments, and finally from the county and local with power in the individual. The evolution of power across the 20th century was the antithesis to this system, with ever greater concentrations of power in DC and our mega-corporations. In part, the system isn't working because it was never designed to work like this in the first place.

We need to reform our political economy and the only way we're going to do that is by breaking-up power. We need to revitalize the American system by embracing the notion of equality and distributed power. Most interesting, over the last few decades, we have learned more about the ability to sustain order from the bottom up using distributed networks. The Internet is the best example, showing distributed networks can be very stable, distributing power as opposed to hierarchical centralization. In many ways, this is not in anyway foreign to the first American system. In reforming our political economy, it would serve us well to think about how we revitalize the American system, at the same time evolving it for the 21st century.

Econned

The result has been a massive transfer of wealth, with its centerpiece the greatest theft from the public purse in history. This campaign has been far too consistent and calculated to brand it with the traditional label, “spin”. This manipulation of public perception can only be called propaganda. Only when we, the public, are able to call the underlying realities by their proper names—extortion, capture, looting, propaganda—can we begin to root them out. -- Yves Smith, Econned

When we dropped political from economy, we made a grave and what might prove fatal error. We made the republic subservient to mega—corporations and allowed the dominance of crackpot pop-economic theories to trample over the millenia-old hard won wisdom of self-government. For example, how many economic theories have been written on the importance of the First Amendment's freedom of the press to the vitality of the American political economy -- not many, if even one?

Yet, a vigorous free press is essential to every aspect of American prosperity. So, as our newspapers folded and consolidated and our broadcast media became handmaidens to corporate power, we witnessed a tremendous decline in journalism, particularly investigative journalism, which had a long and important tradition in this republic's vitality. The mother of investigative journalism, particularly concerning corporate power, is Ida Tarbell, who a century ago wrote, The History of the Standard Oil Company, documenting the manipulations, thefts, grafts, and other criminal activities of John D. Rockefeller and his cohorts in their monopolization of the oil industry.

While we have lost the great tradition of a hearty journalism in our old media, it is rising again across the new medium of the Internet, and it has been utilized in helping shed light on the underlying scandal of the financial crisis. In the tradition of hard hitting, no bullshit investigation, Yves Smith has written Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.

Econned is the story of how our financial system has become a mass ruse, allowing Wall Street and the largest banks to become predatory, treating their clients as lambs to be fleeced and fatted calves to be slaughtered. It is the story of how a very small group of people gained complete control over the American, and much of the global economy, driving it into the ground, then walking away with trillions of more dollars, while the economy remains on life-support.

How did this happen? Econned tells the story, starting with the greatest problem of contemporary economics, an economics stripped of politics, so it might pretend to be a science. Smith goes through the litany chanted by our economic priesthood for the past several decades – efficient market theory, free markets, and mathematically modeling the future – the equivalent of economic hokum that allowed Wall Street and the banks to dismantle New Deal regulations which kept their worst abuses in check for a half-century.

Once establishing the intellectual foundations, Smith explains the great scaffolding of fraud erected on top of it. She documents the roles of Bankers Trust, Salomon Brothers, JP Morgan, Citi and others as they “innovated” their way out of regulation and into their clients' pockets with derivatives, securitization, and other “efficiencies.” All along, right beside them, stood our elected officials and regulators, such as Fed Chiefs Greenspan and Bernanke, Treasury Secretaries Baker, Rubin, Summers, and Paulson, SEC chiefs, congresspeople, and presidents -- all co-conspirators.

In the final third of the book, Smith details the pinnacle of the great con and how it all came crashing down. Then, the government stepped in to help an orderly looting of the public purse worth trillions of dollars and counting, thus insuring a crippled economy for many years to come.

Econned is an excellent read and needs to be read by all. It is the story of a criminal class, who have separated themselves from the majority to seek their own profits. It is the story of how our political economy is broken. In the end, it is a call to the American people, in the great tradition of this republic, to step-up and fix it. Yves Smith is a citizen and patriot, she deserves our gratitude.

make markets be markets

Wednesday, I attended a conference initiated by the Roosevelt Institute on the financial mess. The conference's speakers included people with experience on Wall Street, the banking industry, government and academia. At two and half hours, it was relatively short, giving each speaker the opportunity to make their points and providing a sharp focus. One underlying theme of the event was fraud, the great elephant in the room, that neither the press or our government officials acknowledge, though it is a fundamental element to the financial crisis and its solutions.

Joe Stiglitz started the conference and stated how reducing transparency and hiding information was an essential element to the crisis. Stiglitz concluded, "Innovation was regulator and tax arbitrage." Wall Street and the banks deliberately added opacity and complexity to confuse clients and consumers. Elizabeth Warren pointed out, “complexity made a lot of profits," for example, she showed how the average credit card contract in 1980 was one page, today it is thirty.

This opacity and complexity helped make the financial industry predatory against their clients and customers. Not only did government regulatory agencies fail in stopping this confidence game of historical magnitude, but so did markets. NYU's Lawrence White pointed out the credit agencies such as Moody's and S&P, whose role is to provide independent analysis, essentially became co-conspirators as their business model changed from being paid by investors to being paid by the Wall Street issuers, making it against their interests to issue dour ratings on investments.

The only truly rigorous aspect of economics is accounting. It's no surprise that as the banks and Wall Street sought opacity and confusion through complexity, their greatest target would be the accounting system. There were various elements of "accounting innovation", but the largest, most notorious, and completely incredulous was the practice of "off balance sheet" accounting. One of the greatest elements of this off-book accounting was secularization—simply, the practice of taking existing debt, be it mortgages, student loans, or even credit card debt, bundling it together, then selling it as a completely different product. Josh Rosner, who called the Fannie and Freddie accounting scandal in 2001 and the housing peak in 2005 stated:

"Poorly developed and opaque securitization markets drove excess liquidity and irresponsible lending and borrowing...securitization markets too often operate in a "Wild West" environment where the rules are more often opaque than clear, standards vary, and useful and timely disclosures of the performance of loan level collateral is hard to come by. Asymmetry of information, between buyer and seller is the standard."

While Mr. Rosner pointed to the problems of securitization, Frank Partnoy went after the greatest scam, the derivatives markets. Mr Partnoy pointed out there is currently $600 trillion in derivative positions on a global economy of $60 trillion. Derivatives are another off-balance sheet innovation, in which speculators may take pure gambling positions, allowing them to take positions on matters in which they have no stake. It was in paying-off derivatives that a $185 billion of tax-payer money flowed through AIG. Today, then New York Fed head Timothy Geithner, Treasury Secretary Hank Paulson, and Fed Chair Ben Bernanke all claim they didn't authorize this payout, the check seemingly magically sent.

To make his point even clearer, Mr. Partnoy put up Citi's official balance sheet, saying it was a "fictional balance sheet", representative of an industry in which financial innovation made the most basic accounting, the one thing which can offer real insight into a company's health, just another part of an elaborate scam.

Michael Greenberger of the University of Maryland made the important point that most of what we all call financial innovation is simply the resurrection of many old practices, outlawed in the 1930s, now dressed in new garb. He pointed specifically to the 1936 Commodities Exchange Act as representative of all New Deal financial reform. It insured transparency, open exchanges, anti-fraud, and anti-manipulation. He contrasted this to the 2000 Commodities Futures Modernization Act which gave modern derivatives and open field. Greenberger noted the Act was supported vigorously by then Fed Chair Alan Greenspan, SEC Chairman Arthur Levitt, and Treasury Secretary Larry Summers. The law turned derivative markets into history's largest casino and its proponents knew exactly what was coming and preempted state gaming laws, thus derivative gambling could be completely unfettered.

Rob Johnson of the Roosevelt Institute was the last speaker and talked about the final arbitrage, which is "too big to fail." It is the arbitrage of the republic by looters who have created a system so rife with fraud that it brought down the American economy, throwing millions out of work, paying the very perpetrators trillions of dollars and counting. These very same people bought and sold our elected officials so often in the past several decades, that today DC might very well be deemed the one functional market. You actually get what you pay for.

The conference put out a very excellent report available here. If we're going to get our economy up and running again, the first thing we're going to have to do is end the fraud.

as the debt world turns

The UK Telegraph has an interesting article(tx pat) on the thoughts of Mr. Dimon of JP Morgan:

Mr Dimon told investors at the Wall Street bank's annual meeting that "there could be contagion" if a state the size of California, the biggest of the United States, had problems making debt repayments. "Greece itself would not be an issue for this company, nor would any other country," said Mr Dimon. "We don't really foresee the European Union coming apart." The senior banker said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged.

Oh California! The state and local governments are going to soon run out of things to sell, what then? Of course, the more interesting note is Mr. Dimon says their risk on Europe is hedged. We saw how that worked over the past two years, you dear tax payer are the final hedge. Now Goldman has taken a lot flack, but Morgan is more culpable. They are the derivatives factory that helped pump the debt bubble to its greatest girth. I did like how a couple weeks ago at the Financial Commission, Mr Dimon sat back and let Mr. Blankfein do all the talking, "You tell em LLoyd!" Smart.

Meanwhile, Bill Gross has his latest financial outlook up and he writes:

Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries’ workers/citizens, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap – making sure that consumers keep buying things. When the private sector assumed too much debt and asset prices bubbled (think subprimes and houses, or dotcoms/NASDAQ 5000), American-style capitalism with its leverage, deregulation, and religious belief in lower and lower taxes reached a dead end.

People like Bill Greider and others have been writing this for twenty years, while people the debt peddlers have been advocating the win, win, win situation of corporate globalization. Now the writing is on the wall and PIMCO and the rest of the debt aristocracy want all the debt they sit on and they no business peddling in the first place made good.

Mr Gross' piece does a good job in laying out the parameters of the current debate on debt. Simply, one side says its time for the profligates to meet austerity and repent by spending the next twenty years working to pay their debt down, good for our financial aristocracy anyway. The other side says simply more debt will allow the economy to grow again and eventually make good on the debt. Neither side is very palatable.

Right now we are spiraling down to an ever more simplistic debate on this that will in the end serve no one well. The debt reveals imbalances in the global economy that must be addressed. Mr. Gross is right that the American and global economy of the last several decades is unsustainable, it makes no sense to pile up more debt continuing the status quo. The pro-debt folks are also correct that it makes no sense to simply cut off the blood supply and lose a few limbs to save the body.

We need to split the difference. Call it the new centrism. We need to destruct a great deal of the debt created in the past ten years, we can start with all the derivatives sitting at JP Morgan and write down mortgages, lowering payments to keep people in their houses. Secondly we can create more debt, but it needs to go in transforming the economy down a sustainable path, for example not more money to buy cars, but to build public transportation. The debate right now is about cutting or spending to sustain an unsustainable status quo.