Wednesday, October 27, 2010

politics, economy, and banks

New York, New York big city of dreams
And everything in New York ain't always what it seems
You might be fooled if you come from out of town
But I'm down by law, I know my way around
Too much, too many people, too much
- Grandmaster Flash and the Furious Five

In a piece that illustrates when you're reading the NYT, sometimes you need to check to see if you accidentally clicked over to The Onion, David Leonhardt has a "timely" piece on how the economy is hurting Obama and the Dems. Two punchlines,
On the evening of Dec. 3 last year, the Bureau of Labor Statistics sent an advance copy of the next morning’s jobs report to the White House...It showed that job losses had all but stopped in November, after nearly two years of big declines. White House aides exulted. Christina Romer, a top economist, brought a copy of the numbers to the Oval Office, and President Obama embraced her. A photograph of the moment, with a Christmas tree off to the side, was hung in the office of the Council of Economic Advisers. The good news — and the optimism — would continue for the next few months.
“The health care bill alone is the most significant and far-reaching piece of domestic social policy in my lifetime,” says Neera Tanden, the 40-year-old chief operating officer of the liberal Center for American Progress, who worked in the Clinton and Obama administrations and was a top official in Hillary Clinton’s campaign. In all, Ms. Tanden added, “It is hard to see a more productive session of Congress in decades.”
Well, as Dems are finding out, "productive" is in the eye of the beholder, while Ms. Tanden didn't seem to get the memo the Dems weren't running on their "most significant and far-reaching piece of domestic social policy."

Meanwhile, the complete capitulation concerning any real financial reform, where the Dems proved themselves for all who honestly care to look the servants of Wall Street and the big banks, continues to be a drag on any sort of economic revival. The WSJ has an excellent piece how the banks all posted profits this quarter by raiding their reserves against bad loans, because of course the housing market is getting better, right? The piece states,
The biggest U.S. banks virtually doubled their collective earnings in the third quarter just by injecting $8.1 billion into net income from funds they had set aside to cover loan losses.
There are 18 commercial banks in the U.S. with at least $50 billion in assets, and together they earned an adjusted $16.8 billion in the third quarter. Of those profits, nearly half, or 48%, were from drawing down what bankers call loan-loss reserves, according to an analysis by Dow Jones Newswires. A year ago, the same 18 banks earned $6.2 billion in quarterly profits; at that time, they added more than $7.8 billion to the same reserves, a move that reduced their profits. The analysis omits a $10.4 billion noncash charge to earnings that Bank of America Corp. disclosed during the third quarter.
Finally, Chris Whalen has a must read piece on how until we restructure and reform the financial sector, we will have no economic vitality. Whalen writes,
Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: "This is not a monetary problem."
Forget Treasury Secretary Tim Geithner lying about the relatively small losses at American International Group (AIG), the fraud and obfuscation now underway in Washinton to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason. And the sad part is that all of the temporizing and excuses by the Fed and the White House will be for naught. The zombie banks and GSEs alike will muddle along until the operational cost of servicing bad loans engulfs them. Then they will be bailed out -- again -- or restructured.
Make no mistake folks, there's a criminal element atop our financial industry, who operate with both the complicity and culpability of much of our political class. Until we reform our politics and the financial industry, we will not have economic vitality. And we will not have reform, until it is demanded and undertaken by the American people. That is where we are.

Friday, October 22, 2010

American Conservative

When the president does it, that means it's not illegal. - Richard M. Nixon

One of the great things about being one of our masters of the universe is the rule of law doesn't apply to you. If you'r master of the universe, by definition you are the law. It's also really helpful when those supposedly in charge of upholding the law adopt a policy of accommodation. If you can get away with ignoring the law, especially if you made a profit in so doing, it's justified. The past is the past is now official policy for our political class, whether it's holding accountable those who actively misled the country to war or for those who collapsed the financial system and everything in between. However, the growing foreclosure fiasco may make clear to us all there's real value in the rule of law. Again, Yves Smith has been way ahead on this issue and should be read. While Chris Whalen has a nice piece on Bloomberg TV(tx credit writedowns), succinctly explaining the issues, calling the foreclosure fiasco a cancer on the financial system, well worth watching.

We need to quit talking about money in aggregate, such as deficits, debt, GDP, and start talking about what it really represents. There's a lot of bad money out there and we need to get rid of it. In order to do this, for example restructuring the underwater mortgages now representing over a quarter of all mortgages, we need to know what exactly money represents, not abstractly, but concretely. If money was created fraudulently, it's not valid and those who were involved in the fraud need to go to jail, not from a sense of spite, guilt or revenge, but a sense of justice, an understanding of the necessity of the rule of law.

Yesterday, I read one of the most amazing thoughts I've read in the main stream medium in quite a long time. In a LAT book review of one of the members of Pakistan's Bhutto clan, the reviewer writes of Pakistan,
Though this memoir is undeniably intimate, it also offers a political glimpse into a corrupt Pakistan. Government without checks and balances.
Checks and balances. For Pakistan it remains a radical notion, for us it's a conservative one, a practice more important to the success of the American economy than any fairy tale told by our free-market priesthood. While the processes and structures of checks and balances need some updating for the 21st century, it is something for which we can all proudly agree to be American conservatives.

Thursday, October 21, 2010


You gonna fuck on me?! -- Mr. Leslie Chow

Boy, it's weird out there in financeland, and no doubt we ain't seen nothing yet. Bloomberg reported the other day something that's still a headscratcher. PIMCO, Blackrock and the NY Fed allied together to begin a process of trying to get Bank of America to repurchase(put-backs) some of the garbage mortgages they sold, so that BofA, not PIMCO, Blackrock, or NY Fed, would be stuck with losses, and folks BofA nor the rest of the big banks can take too many losses without the house of cards that has been built in the last two years comes a tumblin, sucking more money out you, the taxpayer's pocket. Yves Smith points out the process itself would take years, but this needs close watching, as it sure looks peculiar.

First and foremost peculiar is the involvement of the NY Fed trying to make one of its weakest wards take losses. Now, you might ask what the NY Fed is doing with a bunch of bad mortgage securities, well they got them from the Bear Sterns and AIG, which is part of the garbage and losses the Treasury never accounts when they put out their latest piece of propaganda on how the bank bailouts haven't cost tax payers any money. The WSJ succinctly describes this peculiar situation in the following way,
Why is the New York Fed suddenly joining a revolt against the banking system it has worked for two years to shore up? Why is Bank of America a target? Did Pimco and BlackRock gain an advantage in their valuation of the mortgage-backed securities because they are advisers to the New York Fed?

And what kind of discussions did the two companies and regional Fed bank have before going after Bank of America? The answer: none, according to people close to the Fed.
Ho-ho-ho! The piece concludes,
Yet for an American public leery of the ties between government and Wall Street, the new front in the battle over bad mortgages raises a valid question: Just whose interests are the parties involved in the case fighting for?

On Monday, regulators move to run banks they regulated on Friday. Investors sue banks that own them. The government has a policy to prop up a systemically important industry, and then one of its arms drives a hard bargain with one of its weaker links.

Wall Street is much closer to the Jersey Shore than it seems.

Remember, PIMCO came out a few months ago saying some of the bad debt out there needed to be destroyed, and this would seem PIMCO's first shot at trying to define what's good and what's bad money, and they've taken on the most unseemly allies. In a related piece, the Post has an article stating Fannie and Freddie are going to need at least another 200 billion dollars, again money the Treasury never points to when it says the bailouts worked.

Finally, the Irish are deciding what's good and bad money, and they might finally make the bond-holders take some hits. Over the next few years, it's going to be a big fight to decide what's good and what's bad money, and make no mistake, in the immortal words of Mr. Chow, it's all about who is gonna be fucked on.

Monday, October 18, 2010

deflation, technology, and political economy

In the modern industrial era, there have been three great deflationary periods. The post American Civil War/Populist era, the Depression era, and the Japanese for the past two decades. Deflation remains not very well understood. Each era has some similarities but also great differences. Money definitely plays a role, but how much as cause, opposed to effect, is very much open to debate. At this point, money as prime cause dominates economic thinking. However, massive societal and/or global deflations represent much greater problems than questions on the quantity of money. They represent fundamental imbalances and changes in an economy, driven in large part by technological change. Just as those of the past, our present deflation challenges will not be met without addressing these greater issues of political economy.

The greatest barrier to a more encompassing and valuable understanding of deflation is the almost complete dominance of monetary thinking in all things economic. There hasn't been a great episode of deflation in the United States since the Depression. In the 1970s, once accepted thinking on deflation was supplanted, when it proved ineffectual in meeting the challenges of America's greatest inflationary era. Into the breach stepped monetarism, and for the past 30 years monetary thinking has been not simply dominant, but dictatorial in its rule. How this came about is both important and easier to understand in a political economic sense than a pseudo-scientific economic sense. At the center of the story stands one of American history's greatest and most destructive propagandists, Milton Friedman.

With a revisionist view of the causes of the Depression, Mr. Friedman rose to fame in the early 1960s . He laid all blame at the feet of the Fed. He writes,
The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 ... Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government.
Lucky for Milton, he had no deflation for the next 40 years to prove his theories wrong. However, it is necessary to understand Mr. Friedman's political objectives, which he states in the last sentence, and they are key to understanding how an obscure academic from the University Chicago could become a major political figure riding a cockamamie revisionist theory of the Depression. Friedman's real objective was political, to loose the power of Wall Street and the mega-corporations, briefly constrained by reforms of the New Deal era. With financial backing from these entities, Mr. Friedman, his allies, and followers gained academic, media, and political power, fundamentally redefining and restructuring political economy in the United States over the past thirty years. Nonetheless, despite his overwhelming success in all these areas, when it comes to deflation, Mr. Friedman's thinking still offers few solutions.

It's easy to see how one can honestly misconstrue money as the greatest factor in deflation, but this is both a historical misreading of events and just as importantly a graver barrier to necessary solutions. One thing the three great deflations have in common; they were preceded by great financial bubbles. However, these bubbles were much more than simple rises in the quantity of money, they represented great underlying distortions of the economy, both as attempts to keep a no longer sustainable status quo, and heralding a rise of new economic structures driven by the adaption of new technology, requiring much bigger fixes than simple money manipulation.

This important dichotomy can best be represented by two men. First, Milton Friedman's greatest disciple, Alan Greenspan, who wrote in 1998,
"While asset price deflation can occur for a number of reasons, a persistent deflation in the prices of currently produced goods and services -- just like a persistence a increase in these prices -- necessarily is, at its root a monetary phenomenon."
As opposed to former Bank of Japan Governor Hayami, who in 2001, with ten years of deflationary experience wrote,
"At a time when prices decline on account of productivity gains based on rapid technological innovation, a forceful reduction in interest rates with a view to raising prices may amplify economic swings."
In these three deflationary eras, these technological innovations have taken various forms and proved as important as money in defining the era. For example, in his seminal work on democracy and America, The Populist Moment, Lawrence Goodwyn writes,
In not the slightest way did silver address the accelerating movement toward industrial combination. As John D. Rockefeller has conclusively demonstrated in the course of creating the Standard Oil Trust, railroad networks were a central ingredient both in the combination movement itself and the political corruption that grew out of monopoly.
Money was an essential element to the Populist enterprise, but it was not alone, nor might it be argued, the greatest. The Populists were very much at war with the rail roads, which in the 1870s and 1880s were completely destructing established American agrarian life. It is imperative to point out, the Populists' concerns were not against rail technology, but how it was controlled. In fact, in the Populists' famous 1892 Omaha Platform, the rail road plank is third, ahead of the finance question:
Third.—We believe that the time has come when the railroad corporations will either own the people or the people must own the railroads, and should the government enter upon the work of owning and managing all railroads, we should favor an amendment to the Constitution by which all persons engaged in the government service shall be placed under a civil-service regulation of the most rigid character, so as to prevent the increase of the power of the national administration by the use of such additional government employees.
Note, importantly, how the Populists were so very concerned with newly concentrated power in turning control of the rail roads over to the federal government, they insisted on a constitutional amendment to check and balance it. Unlike, many of their 21st century progeny, 19th century American citizens understood the democratic imperative of decentralized political power. Though, they found federal control a necessary solution to the rail road problem, they nonetheless remained greatly aware and disconcerted by the idea. However the essential point is the Populists understood the importance of technology in creating their problems, thus included it in the solutions.

Fifty years later, technology played a tremendous role in the Depression's deflation. By the 1920s, the United States was rapidly changing with the implementation of mass electricity, broadcast media, and the automobile. The New Deal's political economy solutions, including establishment of unions, the great electrification projects, and the regulation, in retrospect, the very awful regulation of broadcast media by the federal government, all played as important roles as financial reform in getting the United States out of the Depression. Today, we have new technologies, most importantly the networked microprocessor, fundamentally changing our political economy, particularly in helping foster the control necessary for corporate globalization. This process has greatly contributed to deflationary/stagnant economic environments in Japan, the US, and Europe. The role corporate globalization has played, especially in the development of China and other parts of East Asia, and the resulting impact on the Japanese export economy has not been given nearly enough attention as a cause of Japan's two-decades deflation problems.

In short, deflation is not simply a monetary problem, and thus will not simply be solved with monetary solutions. We need massive financial and monetary reform in this country and across the planet, but they alone will not be sufficient to meeting the challenges facing our greater political economy. We need to fundamentally restructure our entire political economy.

Thursday, October 14, 2010

slouching toward bethlehem

The best lack all conviction, while the worst
Are full of passionate intensity.
-- W. B. Yeats

In 1999, Mr. Bernanke wrote a piece called, Japanese Monetary Policy: A Case of Self-Induced Paralysis?. It lays out perfectly well our dominant Monetarist's thinking on Japan's popped financial bubble and the following decade long, now decades long "slump". The paper exactly lays out the response Mr. Bernanke has thus far taken in response to America's popped financial bubble. More importantly, it reveals the next steps Mr. Bernanke appears ready to undertake. It is a very rational, though quite radical piece, with a very irrational conclusion -- if dumping a bunch of money onto the financial system hasn't worked, the solution is to dump more.

Mr. Bernanke begins,
I tend to agree with the conventional wisdom that attributes much of Japan’s current dilemma to exceptionally poor monetary policy-making over the past fifteen years.
He then proceeds,
Having pushed monetary ease to its seeming limit, what more could the BOJ do? Isn’t Japan stuck in what Keynes called a “liquidity trap”?
He answers,
I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan....far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism.
Japan must continue the same actions, only more. Mr. Bernanke then lays out what these actions must be, and they are important because they are the actions the Fed has undertaken in the US with little impact. Now, Mr. Bernanke prepares to up the ante.

In the 1990's, the Bank of Japan dropped interest rates from 6.5% to less than 1%. In 1999, when Mr. Bernanke wrote his paper, interest rates had been below one percent for five years. This was also accompanied by Japan's version of "pretend and extend", where the banks and corporations did not have to account for the bad loans on their books. In short, it was the exact same policy the Fed and Treasury have undertaken here, with very similar results. While, Mr. Bernanke acknowledges one of the great problems Japan faced was lack of demand, despite all the present and historical evidence to the contrary, he advocates greater monetary action will solve the demand problem.

Bernanke's first suggestion is in the realm of traditional central banking, mixed with a call for active propaganda. The bank must keep interest rates at zero and then propagate a high inflation target. He simply dismisses the idea that a central bank has no real ability to meet any given inflation target, as long as it's a solid number he states, it will work.

His second action, now familiar to the US and the rest of the world, is devalue the currency. He writes,

Through its effects on import-price inflation (which has been sharply negative in recent years), on the demand for Japanese goods, and on expectations, a significant yen depreciation would go a long way toward jump-starting the reflationary process in Japan.
Noting currency policy is not under the aegis of a central bank, Mr. Bernanke writes,
On legal authority, it is true that technically the Ministry of Finance (MOF) retains responsibility for exchange-rate policy. (The same is true for the U.S., by the way, with the Treasury playing the role of MOF. I am not aware that this has been an important constraint on Fed policy.)
And there you have it. In the monetarist's mind and no doubt Wall Street's and the banker's, legality is simply a technicality. All power should in fact lie with the Fed, banks, and financiers, and of course, that is exactly what has happened over the course of the last couple decades.

Next, Mr. Bernanke gives his argument against such currency manipulation being viewed hostilely by other nations,
The “political constraints” argument is that, even if depreciation is possible, any expansion thus achieved will be at the expense of trading partners—-a so-called “beggar-thy-neighbor” policy. Defenders of inaction on the yen claim that a large yen depreciation would therefore create serious international tensions...Moreover, the economic validity of the “beggar-thy-neighbor” thesis is doubtful, as depreciation creates trade—-by raising homecountry income—-as well as diverting it. Perhaps not all those who cite the “beggar-thy-neighbor” thesis are aware that it had its origins in the Great Depression, when it was used as an argument against the very devaluations that ultimately proved crucial to world economic recovery.
Again, this is essential to understanding the Fed's actions today. It is the monetarists' revisionism of the Depression era currency turmoil. An important point to make is the devaluations of the 30s took place against an "objective" standard, gold. Today, there is no objective standard, all money is relative, though by devaluing the dollar, the defacto global reserve standard, you're not simply devaluing a currency, you're devaluing the reserve standard itself. In short, the currency turmoils of the 30s were indicative of the great global imbalances developed over decades. Currency turmoil was more an effect, than a cause, and in the end was not solved by further currency manipulations. But when you wield a monetary hammer, every problem looks like a nail.

Mr. Bernanke's final action is one he already has undertaken and is about to expand, Quantitative Easing II, in which the Fed buys government and corporate debt to inject more money into the financial system. Mr. Bernanke writes,

In thinking about nonstandard open-market operations, it is useful to separate those that have some fiscal component from those that do not. By a fiscal component I mean some implicit subsidy, such as would arise if the BOJ purchased nonperforming bank loans at face value, for example (this is of course equivalent to a fiscal bailout of the banks, financed by the central bank). This sort of money-financed “gift” to the private sector would expand aggregate demand for the same reasons that any money-financed transfer does. Although such operations are perfectly sensible from the standpoint of economic theory, I doubt very much that we will see anything like this in Japan, if only because it is more straightforward for the Diet to vote subsidies or tax cuts directly. Nonstandard open-market operations with a fiscal component, even if legal, would be correctly viewed as an end run around the authority of the legislature, and so are better left in the realm of theoretical curiosities.
This is the nut. Here Mr. Bernanke lays out extra-constitutional actions, that far from "theoretical curiosities", he aggressively implemented two years ago, loading up the Fed's balance sheets with garbage paper from the banks. As these actions proved both illegal and insufficient, he is about to embark on a new endeavor, having been met with no rebuke, in fact, he was reconfirmed in his position by the President and the Senate.

The Fed's policies are blowing bubbles in financial markets across the planet, this in turn is further removing the financial markets from the realities of the physical economy. This most likely can go on for quite a long time, but the longer it continues, the more volatile the financial system will become, causing further and further destruction to the real economy, and it must be noted, the rule of law. We need to take new actions. First, people need to go to jail. Second, we need to start writing bad money off the books, not continue creating more of it. We need to restructure the financial system and the big banks need to be broken up. We can take all the excess housing and commercial real estate and use it to create new local "savings and loans", actively controlled by local public entities and private interests, which can only invest in local activities.

There comes a time in history, where the establishment's actions seem to be quite insane. It is a continuing of the actions of the past, despite the obvious fact they aren't working. This recognition is met not with change, but a doubling up on the same actions hoping for different results. Welcome to the Fed's funhouse.

Wednesday, October 13, 2010

Rule, Britannia, rule of law, and rule of insolvency

The nations, not so blest as thee,
Must, in their turns, to tyrants fall;
While thou shalt flourish great and free,
The dread and envy of them all.
"Rule, Britannia! rule the waves:
"Britons never will be slaves."
-- James Thomson

Martin Wolf has a nice piece on the Fed's currency war. However, some of his conclusion are at the very least debatable. Wolf writes,
Aggressive monetary policy by reserve-issuing advanced countries, particularly the US, is an element in both processes. The cries of pain now heard around the world, as markets push currencies up against the dollar, partly reflect the uneven impact of US policy. Still more, they reflect the stubborn unwillingness to accept the needed changes, with each capital recipient trying to deflect the unwanted adjustment elsewhere.

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

"The US must win" and " has infinite ammunition", states Mr. Wolf. Phew, whatever happened to the Brits? Note to America: loss of empire not need be accompanied by lost of dignity. Though you wouldn't understand that from the English. Remember Tony Blair and "New Labour", you'd be one of the few. His famous incessant pandering to our modern Millard Filmore, and then more infamously his being led by the leash into Iraq by W and Cheney. Oh Britannia!

The Brits are completely tied to the US at this point economically, so writing from London, Mr. Wolf's perspective is understandable. After all, what do the English have to offer the Chinese? Fish and chips? Debauched royalty as tourist attraction? If they want that, the Chinese can restore their own. While Europe, particularly the Germans must be sighing relief the Brits never got in the Euro, "Ve have Spain, Greece, and the Italians. Nein, Nein, Nein, Englanders!" To prove the point, Germany's central banker was here yesterday saying no more ECB purchases of dead beat governments' bonds.

I guess the biggest question is, has Mr. Wolf read Mr. Bernanke's book, though maybe even Mr. Bernanke hasn't read his own book. Ben's concluded revisionism of the currency turmoils of the late 1920s and 1930s, was the best thing would have been a coordinated devaluation of all currencies. However, by devaluing the global reserve standard--the dollar--Mr. Bernanke is causing the rise of almost every other currency, which is a funny kind of coordinated devaluation. Now what will be even funnier is its hard to see how the rise of a significant number of global currencies will not lead to further global contraction, and thus...wait for it... renewed fleeing to the dollar as a perceived safe haven. Just ask the Japanese how that works. Still, being the largest economy on the planet, America, as Mr. Wolf understands, can throw its weight around, but how it "wins", might not be as expected.

On the "homeland" front, the mortgage fraud fiasco grows. Understand this is an example of the deterioration of the rule of law in this country, particularly regarding the banks and Wall Street. It's been great fun with the bailouts and zero interests rates instigated by the banks' and Wall Street's massive fraud. No one went to jail. Each time the law is not upheld, leads only to more transgressions. Again, Yves Smith is doing bang-up job covering this and she was on it well before everyone, so read Yves.

Since we've replaced the rule of law with the rule of "markets", insolvency remains justices' great arbitrator. Chris Whalen gave an excellent report on the problems foreclosures will cause the banks, concluding,

The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than ¼ of the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.

Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy.

The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007‐2009 period only means that this process is going to occur over next three to five years –whether we like it or not. The issue is recognizing existing losses ‐‐not if a loss occurred.

Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for re‐creation of RFC‐type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble. End of the liquidation cycle of the deflating bubble will arrive in another four to five years.

Tuesday, October 12, 2010

on money

Lots of interesting reading if you have any interest in money. The Fed's accomplished in a couple years what many of America's foes have tried for decades: a global questioning on the value of the pax dollar. The Fed's flooding the planet with dollars is certainly creating exciting results. The stock market is up, the bond market is up, commodity markets are up, and emerging markets are exploding higher. In fact, everything seems to be churning up except for American real estate and the American economy, but that just gets Wall Street more excited because it means the Fed's going to keep pumping.

Remember, the Fed put itself in this situation over the past three decades using loose money policies, combined with the financialization of the economy, which required ever looser money policies, especially after the biggest bubble pop two years ago. The Fed's policies have for the banks and Wall Street become one of perpetual profit, there are no losses, except those that can be shifted to the public. The real solutions are simple, but politically nonviable for a government controlled by Wall Street and the banks. Losses must be taken and the financial sector must be shrunk by at least half. As Chris Whalen says in his latest piece,
...the horrible damage that the Bernanke Fed is inflicting upon real American in order to bail out the large Wall Street banks. And the irony is that all of this damage and sacrifice by Dianna and tens of millions of American individuals and businesses who depend upon interest income to survive will be for naught. The Big Banks will have to be restructured...
But the Fed will continue, and this will continue cracking the foundations of global finance. The FT has a nice piece about the last few decades process of globalizing finance. And Michael Hudson has a real good piece on the war launched by the Fed in a failed attempt to save Wall Street and the big banks. Hudson writes,
“Quantitative easing” is a euphemism for flooding economies with credit, that is, debt on the other side of the balance sheet. The Fed is pumping liquidity and reserves into the domestic financial system to reduce interest rates, ostensibly to enable banks to “earn their way” out of negative equity resulting from the bad loans made during the real estate bubble.
The problem is that U.S. quantitative easing is driving the dollar downward and other currencies up, much to the applause of currency speculators enjoying a quick and easy free lunch. Yet it is to defend this system that U.S. diplomats are threatening to plunge the world economy into financial anarchy if other countries do not agree to a replay of the 1985 Plaza Accord “as a possible framework for engineering an orderly decline in the dollar and avoiding potentially destabilizing trade fights.” The run-up to this weekend’s IMF meetings saw the United States threaten to derail the international financial system, bringing monetary chaos if it does not get its way. This threat has succeeded for the past few generations.
Nations are fighting back, the Thais just announced a tax on foreign capital flows, and the Brazilians did the same. But this is all a losing game, for the entire corporate globalization endeavor has been an American game, with our financial system and political class selling-out the American people for a little more lucre.If the Fed and Wall Street want to blow the whole thing up in the name of saving it, nothing or no one can stop them. And this business can go on for a lot longer than anyone believes at this point

There's a breath of hope about ending the lunacy from none other than the Irish. The FT writes(tx yves) the Irish are "opening the door to renegotiation with senior bondholders." Time to get the bad money off the books folks. And then the question, what's good money? The Pax Americana is over, whether its next year or in thirty, so the dollar's reign is at an end too, and that will be better for no one more than America.
We need to rethink currencies, local currencies in conjunction with some sort of global money standard, based on the real physical economy such as energy, grains, industrial outputs, Keynes had over fifty things in his monetary "tabular standards." Frankly, that's the easy part, the question is how do you institutionalize it, under what entities? The Fed, or IMF, or World bank, no thanks! We need a rethink on the whole idea of global "order". If we weren't all so caught up trying to save the failed past, it'd be some pretty exciting times for opportunities on creating the future.

Sunday, October 10, 2010

hack politics

Gonna be a twister to blow everything down
That ain't got the faith to stand its ground
Blow away the dreams that tear you apart
Blow away the dreams that break your heart
Blow away the lies that leave you nothing but lost and brokenhearted
-- The Promised Land

Well, the storm for the Dems seems to be whipping-up stronger. The WSJ has a piece about the cracking Northeast and Northwest and if you follow faulty conventional political wisdom, they're supposedly liberal Democratic bastions. They write,
Republican challengers are suddenly threatening once-safe Democrats in New England and the Northwest, expanding the terrain for potential GOP gains and raising the party's hopes for a significant victory in next month's elections.

Republican advances in traditionally Democratic states, including Connecticut, Oregon and Washington, may not translate into a wave of GOP victories. But they have rattled local campaigns and forced the Democrats to shift attention and money to races they didn't expect to be defending.
OK, you hopeless argue the WSJ is just Rupert's rag, another medium for the foul Australian to destroy the United States. That may very well be true, but I'll point you to Jerome Armstrong over at MyDD, and no one has ever accused Jerome of being anything but a good Democrat, Jerome writes,
I step away for a few days, and then look at the polling, and its even worse. And then I read Democratic partisans actually putting in print predictions that Democrats will retain both bodies of Congress (Donna Brazille, Bob Shrum). What are they high on?

The Hotline poll numbers are toxic city for Democratic House incumbents. A slew of 30's and a few scattered low 40's. These are incumbents folks! Anything under 50% and they are 95% out the door.
Well, people like Bob Shrum and Donna Brazille have become very wealthy over the last couple decades destroying the Democratic party. That's their job. They've come to understand it doesn't matter what they say, or if the Dems win or lose, life for them just keeps getting better, thus they can get high on pretty much anything they choose.

Anyway, if Dems lose 60 plus in House, hard to see how they hold the Senate. OK, there's no fun in scaring Democrats. I said a year ago 2010 was no 1994, and it ain't, and to go completely hack, 2012 ain't no way 1996. But we have a lot bigger problems than worrying about which half of our failed political class wins elections, we need a new politics. So, Democrats, in the coming dark nights, remember the wisdom of the Good Doctor, fear is just another word for ignorance.

Friday, October 8, 2010

career opportunities and whigs

They’re gonna have to introduce conscription
They’re gonna have to take away my prescription
If they wanna get me making toys
If they wanna get me.... well hell, I got not choice
Career opportunities the ones that never knock
Every job they offer you is to keep you out the dock
Career opportunities, the ones that never knock
Career opportunities ain't never gonna knock
-- Career opportunities

The new jobs report was out and the economy to no one's surprise is still not creating jobs. But lets be honest for a second here, the servant's economy has for the majority been producing shit jobs for a couple decades now. Which get's to the bigger problem -- left, right and center -- all talk of the economy is about getting back to where it was, not only is that not going to happen, but there were tremendous problems there. To really talk about "fixing" the economy, we need to talk about changing it, because it's never going to be fixed without changing it. So for example, you want jobs, lets talk about the 40 hour workweek. Oh, the unison cries of horror that arise across the political spectrum, getting to the even larger point. America is conservative in a very weird way. There's great nobility in a genuine conservatism, sometimes change isn't the right thing. But American conservatism, and this cuts across the political spectrum is conservative of many things which a few decades ago, or at most a century ago, didn't even exist. It's weird Bubba.

In such times, one must be very wary of dismissing people, because good ideas can come from strange places. Such is this case with Tony Blankley's nice little piece entitled, "Which Party Dies?". Blankley goes back to the 1850s, to the last death of a great American party, the Whigs, writing,

The New York Times has written in explaining why the political parties have lost the confidence of the public: "Their machinery of intrigue, their shuffling evasions, the dodges, the chicanery and the deception of their leaders have excited universal disgust, and have created a general readiness in the public mind for any new organization that shall promise to shun their vices."

The New York Evening Post, in explaining the same condition has written that the people "saw parties without any difference contending for power, for the sake of power. They saw politics made a profession, and public plunder an employment. ... They beheld our public works the plaything of a rotten dynasty, enriching gamblers, and purchasing power at our expense."

The dates of those articles were November and December 1855.
Remember, the Whigs controlled the Congress and presidency in 1852, by 1856 the Whigs no longer existed. The advantage toward extinction lies with neither party at this point, while the major question, and difference, today, is it a survival advantage or disadvantage that the parties only exist in name? If we're going to fix our economy, we have to fix our politics, and as far as that rotted state of affairs, there's absolutely nothing to be conservative about.

Tuesday, October 5, 2010

War, Good God Ya'll

What is it good for?
Absolutely nothing, say it again
-- Edwin Starr

One good rule thumb in trying an understand what's happening with the economy is listen to what Mr. Geithner says, and know that's not possibly right. So, last week when Mr. Geithner states there's no currency wars, that pretty much means it's raging full scale, and the Fed's dropping the biggest bombs. The WSJ has two good articles, the first with the Europeans jumping on the bandwagon calling for the Chinese to raise the value of the yuan, which will no doubt help the Greeks and the Irish, right? The second piece states,
Global efforts to tame the foreign-exchange market stepped up a gear Tuesday as key countries around the world battled to hold their soaring currencies down.

The big problem: as a whole, currency-denting exercises aren't working. The U.S. dollar remains trapped in a downward spiral as expectations of further monetary easing by the Federal Reserve drags it down. That adds further weight to recent calls from a major international body for a big rethink on the global currencies market.

"The currency wars are heating up. Calls for a new global currency structure will heat up," said Kit Juckes, head of foreign-exchange strategy at Société Générale in London. As authorities around the world tried to hose down their currencies overnight, the Institute of International Finance sounded a warning on the current system.

Here on the domestic front, Mark Ames has a really excellent piece on the continuing propaganda war of our corporate oligarchy in their decades long attempt to convince us all that what's good for the boardroom is good for us, and that concentrating economic power in the hands of the few is really freedom for us all. Ames has a strong stomach.

Finally, in a guerrilla skirmish, seems one of the banks biggest gofers, Barney Frank, is facing a little electoral heat. Remember Comrades, Barney was reelected in 2006 with 99% of the vote. While its doubtful that in the next four weeks, the majority of people in MA-4 will come to recognize their interests and those of banks really aren't allied, it is keeping Barney from poisoning other candidates by spreading the ill-gotten largess he gains from Wall Street. Here's what those most concerned have to say,
"It's much more of a race than it has been in prior years, but from our perspective, it would be a real loss to Massachusetts if Barney's not re-elected," said Daniel Forte, president of the Massachusetts Bankers Association, a trade group.
Ho-Ho-Ho, Bubba.

Sunday, October 3, 2010

Lessons on Reform: The Count-Duke of Olivares

Each new fact in his private experience flashes a light on what great bodies of men have done, and the crises of his life refer to national crises. Every revolution was first a thought in one man's mind, and when the same thought occurs to another man, it is the key to that era. Every reform was once a private opinion, and when it shall be a private opinion again, it will solve the problem of the age. – History, R.W. Emerson
Chapters of history are in part composed of tales concerning the rise and fall of nations. All contain verses of the times nations have reach great heights, but then face serious challenges. Aspects of the culture, politics and economy, which brought the nation to its heights, are no longer sufficient to sustain the position reached. Principles and practices once used for achieving success have been abandoned or corrupted, while new circumstances require genuinely new actions, ideas, and methods. In short, the nation faces an era of reform. A peoples' ability to meet this challenge defines their future, a future of either continued possibilities or decline.

Each nation's story like every individual person's life is different. However, all have similarities, some quite striking, offering us lessons from the past for the present. Such is the case with 17th century Spain for 21st century America. By the early 1600s, Spain faced an essential need for fundamental reform of their political economy, similar to what we face today. J.H. Elliott's, The Count-Duke of Olivares: The Statesman in an Age of Decline is an excellent history of the era, offering invaluable lessons on reform from a people who failed to meet the challenges set before them.

Spain's history is long and fascinating. One of the Roman republic's first conquests outside of Italy, Spain fell under Rome's control in 200 BC, with the defeat of Carthage under their sublime general Hannibal. In the 8th century, Spain was conquered in the initial great wave of Muslim ascendancy, and in various ways remained under Muslim rule and influence for the next seven-hundred years. In the mid-15th century, the uniting of the christian kingdoms of Castile and Aragon launched Spain into a high period of cultural, economic and political power lasting roughly a century and half.

In this period, Spain would discover the New World and conquer the great civilizations of the Aztecs in Mexico and the Inca in Peru, keeping the Spanish treasury flush with gold and silver. The Spanish monarchy's matrimonial alliance with the Holy Roman Empire's Austrian Hapsburgs would give Spain control of parts of Europe, including the Netherlands and Belgium. The 16th century Spanish empire was one of Europe's and the world's greatest powers.

Nonetheless, by the beginning of the 17th century, many of the things that had previously made Spain great were causing them problems. The empire was beginning to drain wealth instead of increasing it. The Netherlands was in open revolt, and maybe most importantly, the easy money from the Americas that had drastically changed the Spanish economy began drying up. Elliott describes these economic changes in a way that would be familiar to any contemporary American,

Seventeenth-century Castile was a rentier society, with people at many social levels drawing a substantial portion of their annual income from rentas, in the form of annuities on state bonds(juros) and individual or corporate bonds(censos). Rates of return varied. ...But the underlying problems remained. The crown had a staggering burden of indebtedness; and in the opinion of the Council of Finance, one of the major reasons for the decline of industry and agriculture in Castile was the availability of juros and censos “at such advantageous rates that their yield is considered to be higher than the profits to be made in trade, agriculture, and stockraising.” The result was that people tried to live on annuities, instead of using their capital for more forms of investment.

The great wealth produced by an extensive global network and the easy money policies provided by the massive influx of New World gold and silver, produced both the hollowing and the financialization of the Spanish economy. Over time, real wealth was no longer created in Spain, just debt, which for a short time can be confused with wealth, at least until the debt comes due.

With such a change in political economy comes a necessary change in the power structure. Elliott describes,

The late sixteenth century therefore saw the acceleration of a process that was to cast a long shadow over the future history of Castile—the consolidation of a rentier oligarchy of pederosos(powerful ones), who took advantage of the needs of the crown and distress of the peasantry to concentrate land, jurisdiction and revenues overwhelming into their own hands. The oligarchy was drawn from the ranks of the nobility and the urban patriciates, of the upper echelons of the bureaucracy, and of the wealthy peasant proprietors who knew how to play the market.

If you replace pederosos with Wall Street and mega-corporations, the oligarchy with our political class, and the peasantry with working America, you get a pretty good description of power in our own political economy.

In 1621, the sixteen-year old Philip IV would ascend to the monarchy and appoint the Count-Duke of Olivares to be his chief minister, a position Olivares would hold for the next two decades. Olivares was part of the Spanish nobility who understood far from the great and enduring power Spain seemed to be at the time, they had reached a necessary point of reform.

Olivares understood the tremendous challenges Spain faced. They were both systemic and a problem of personnel. In regards to the latter, one of the previous king's ministers, Santamaria described the situation best,

The corruption from which the monarchy was at present suffering was a result of the wickedness and inadequacy of the men who governed it... Philip must act at once to 'clean out the entire fishpond'. He must get rid of the men who had deceived his father and had packed the palace with their creatures and confidants—all of them men who were 'unworthy and ridiculous, in Spain and outside of it.'

Olivares boiled the problem down to this simple understanding and solution,

Reformation meant a vigorous drive against every kind of fraud; it meant educating the new generation to place the public interest ahead of its own.

In Olivares' twenty-year rule, he would struggle continuously and ineffectively with this problem. While he somewhat successfully carried out a swapping-out of personnel, the greater problems were systemic. The Spanish monarchy was still a conglomeration of semi-independent sovereigns with centuries old powers, traditions, and methods. Olivares attempted to reform government power, usually trying to end-run established ways. For example, with his creation of a Junta De Reformacion, Olivares sought to maneuver around the entrenched power of the royal court. At other times, he created new power for local authorities, such as new banks, in order to get around a corrupted and effete nobility. Yet, these reforms turned out to be halfhearted and insufficient to meet the structural challenges facing the political economy.

By the beginning of the 17th century, the empire was draining wealth. Increasingly, the crown could not meet its bills. The hollowing of the domestic economy limited tax revenues and increased reliance on imports. While the cheap money provided by the supplies of New World gold and silver, to which the economy was ever more dependent due to increased financialization, shrank in abundance each year. There's an amusing story how in 1631 a great financial crisis was instigated by the Dutch seizing the annual gold and silver flotilla sailing from Mexico.

Spain's military entanglements, particularly the costs of trying to keep the Dutch subjugated, grew to be an ever greater burden on the royal treasury. These war burdens would vex Olivares his entire time in office. Tragically, he only added to the problem by getting into fights with the French and a particularly ill-advised campaign in Italy. More than any other single factor, these unsustainable military costs proved the greatest burden confronting any true reform.

The decline of the economy coupled with growing military expenditures created an increasingly heavy tax burden, falling most heavily on the lowest rungs of the economic ladder. Unable to enact real reforms fast or sufficient enough, Olivares turned to manipulating the money supply, unaware or ignoring the fact money's deterioration was a direct result of the problems in the real physical economy.

The Spanish money supply was divided into two media, silver and copper. Silver was held mostly by the aristocracy and used for trade and funding the military. While in the form of the vellon coin, copper was the main currency of the domestic economy. Overnight in 1628, Olivares reduced the value of the vellon by half, creating a little short-term relief, and followed in the future by further ineffective money manipulations. Eight years later, Elliott writes of another change in monetary policy,

Accompanied as it were by harvest failure, the monetary confusion of 1636 had a drastic impact on the wage-earners, and the next two or three years wiped out half the gain in real wages that they had made in the preceding seven. But, as the war made the poor poorer, so it created spectacular opportunities for others to grow rich. The crown's bankers, the military entrepreneurs, strategically placed ministers and royal officials, tax-collectors, the administrators of royal rents and the poderosos of the towns and villages—all saw an opportunity in the crown's embarrassments to feather already well-feathered nests.

Thus, the Spanish economy remained firmly in the claws of the financial and political classes. In an attempt to loose the wealth of the nobility for the good of the greater economy, Olivares would unsuccessfully initiate various banking reforms, even, to almost universal domestic consternation, bringing in the hated international financiers, the Genoese. Nothing proved successful. The financial class and political classes pushed ever greater burdens on those below, leading in the 1830s to revolts around Spain. Elliott, writing of one such revolt in the Basque region, concludes,

The Bilbao riots can be seen at one level as an uprising in defence of traditional Basque liberties. But at another they constituted a movement of popular protest against the domination of the region's life by an entrenched oligarchy—by town councilors, and rich merchants and the local nobility, who formed and intricate network of power and patronage.

In the early 1640s with Spain now at war with France, and the crown facing ever greater economic uncertainty, Olivares was run from office. His reforms had failed, and though many things he attempted were tried again in the coming decades, the Spanish empire was set on the road to a long slow decline. Elliott concludes,

To reverse the trajectory of a nation through revolution from above demands a high degree of discontinuity, with all the consequent strains on the fabric of society. In the circumstances of the seventeenth century the kind of social engineering required to produce such discontinuity was neither intellectually conceivable nor within the realms of administrative possibility. The ordering of society was God-given and its vision of the future was bounded by the veneration of the past. At best, the would-be reformer could do little more than seek to purge excesses, remove abuses, and introduce more or less piecemeal certain administrative, economic and institutional changes which might with the passage of time to help to modify or alter the attitudes of the society at large.

Clearly 17th century Spain faced many similar challenges the United States faces at the beginning of the 21st. We have an economy that has become increasingly financialized and centralized, unsustainable military burdens, and a dysfunctional and corrupt political system. We can learn from the failures of Olivares, most importantly that all movements for reform must be both resolute and significant. Other lessons we can take from Olivares' experiences:

  • When there are systemic political economy problems, simply swapping-out personnel is insufficient.

  • Power is zero-sum. You have to fight and take from established power in order to implement reform. You cannot make them happy, they will be angry. In another era of reform, Franklin Roosevelt replied to the wails of entrenched power, “I welcome their hatred.”

  • When you have problems with the physical economy, no amount of manipulation of the monetary system is going to change things, unless you simultaneously fix the problems of the physical economy.

  • If a system is centralized, dysfunctional, and corrupt, the essential and primary action of reform is to break-up and distribute power.

This last point, optimistically separates us from 17th century Spain. Combining this point with Elliott's insight of Spanish reform being hampered by veneration of the past, an inability to imagine distributing power from established hierarchy, we fully see our advantage. Our republic was born in rebellion against entrenched hierarchy. Whether it is too much corrupt and dysfunctional power in DC, on Wall Street, or in our mega-corporations, the most essential element of reform, breaking up and distributing power is part of the blood coursing the veins of this republic's body politic. It flows in each of us.