The Equanimist

Profligate Banks Use "Emergency" Loans to Dodge Accountability

Posted in Economics, Economy, Political Economy, Public Policy by equanimist on November 11, 2008

By August, 2007, it had become clear to some (namely, me, and I wrote about it here) that (among developing crises) US middle-class profit shares might be insufficient to continue to drive the US economy – that US middle-class profit shares were too small to continue to effect general prosperity.

The so-called “credit crisis” unfolded throughout 2008. Rates of default rose. Home prices plummeted. Banks failed. Credit froze. Markets tanked. One million jobs were lost. And so on.

Ad hoc bailouts came and went but no comprehensive plan of action was proposed until September, 2008, when it appeared that the economy might be on the verge of total collapse and Bush lackey, Henry “Hank” Paulson, swept in with “the Paulson Plan”.

A bloated modified version of the Paulson Plan (a.k.a. “Emergency Economic Stabilization Act of 2008” including the “Troubled Asset Relief Program” or TARP) was approved after “sweeteners” were added to bribe individual members of Congress.

In short order, Hank found a way to use money allocated by the TARP to purchase troubled assets in a manner at once consistent with the broad purview granted him by Congress and inconsistent with explicit intentions to buy mortgage backed securities in reverse auctions.

As of this writing, no TARP money has gone to buy mortgage backed securities or keep homeowners in their homes. And, no further stimulus has gone to the US middle class. But, Bloomberg reports that the Federal Reserve has loaned nearly $2,000,000,000,000US (that’s two trillion US dollars) to unnamed institutions for unspecified collateral (about $6,500 for every legal US citizen). Earlier bailouts coming to about $3,000 per person, that brings the running total cost of bailouts to about $9,500 per person.

If home prices continue to fall and jobs continue to disappear and middle-class wages continue to shrink and credit remains tight, where will these troubled institutions get money to make payments? And what will their collateral be worth?

These loan recipients are beneath contempt and the Fed is acting foolishly. US equity affords the possibility of public oversight and control over pay packages (including salaries, bonuses, perks and etcetera). Federal Reserve loans, on the other hand, shield these so-called “fat cats” – these prodigal bums who bled the US dry – from public scrutiny and sanction. When even bailout recipients continue to engage in profligate excesses despite mounting pressure to reform, it must be inferred that loan recipients intend to continue bad business practices behind doors marked “Private”.

These so-called “emergency” loans must stop. Consolidation of power in the hands of too few has gone on for too long and US democracy is imperiled. The federal government must appropriate money as needed; reinstitute a truly progressive tax code; effect upward middle-class wage pressure and, further, issue progressive “tax credits” to recapitalize the middle class and dilute the outsized profit shares that a tiny sliver of a slice has accorded itself. Until such time credit will remain tight, jobs will continue to vanish and the US middle class and all of its dependents will suffer by every measure.

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Retrenchment Justified

Posted in Economy, Political Economy by equanimist on October 22, 2008

A few weeks ago, Jim Cramer, in whom I don’t usually put a lot of stock, screamed, “Deflation!” or some such thing.

“What the hell are you talking about,” I hollered back. It took about ten seconds to realize: While though we had continued to see extraordinary year-on-year inflation, we had, in fact, already seen huge price-drops on a month-to-month basis.

This is deflation. Gold is down (uhm… buy it???) Oil is down. Stocks are down. “Everything” is down (or on a downward trajectory). And the VIX is bouncing back and forth between stratospherically and ungodly high.

I would bet hard currency against cheap pastry (copyright) that prices are going to keep going down for a while (six months? a year?) and that the economy will remain weak for much longer still.
People keep asking me, “How long?” Dunno exactly.
Experts (whose good opinions inspired me on my present journey) seem pretty sure that we will be in “recession” for at least a few quarters. The OECD doesn’t think we’ll get a revolution out of it. So, I guess, the consensus is something between a few bad quarters and something-less-than never.
If we assume that the “critical mass” types will continue to mismanage the response to the current crisis then, perforce, we will remain one step behind the action. The current crisis being self-perpetuating, if we don’t get out ahead of the crisis then it will probably continue to spiral out of control (i.e., reinforce itself in a positive feedback loop). If it continues to spiral out of control then it’s likely to get a lot worse before it starts getting any better. Where does it stop? Further, if we assume that the next bubble will conform to an exponential curve, then, recovery will be slow. I use Japan as a barometer but it’s not really a fair comparison. Suffice it to say it’s going to be a long time (a decade? more?) before we recover. But, though people often ask me how long it might go on, that’s a distant secondary concern.

Only authoritarian stewards can so manage the public as to effectively depress living standards below some minimum acceptable threshold. “Western” stewards don’t have that kind of authority and can’t exert that kind of power on an historically “free” population.  I shan’t belabor the point. (For a detailed discussion of my take on Modern US Democracy written at the outset of the current crisis and published last year see On Stewardship.)
Has a liberal democracy crossed a line that precludes recovery when civil rights are in retreat, effective net worth is low and lowering, the job-market is something less than weak and weakening, and the financial system is in something short of total collapse?
The US socioeconomy maintains course and the logical conclusion of current trends remains either (1) revolution or (2) radical departure from democracy. That is, if the current crisis is, indeed, self-perpectuating then the US socioeconomy will look very different when the dust settles.

OECD report on income inequality is released

Posted in Economics, Political Economy, Socioeconomy by equanimist on October 21, 2008

A newly released report from the Organisation for Economic Co-Operation and Development ranks the US third worst on a measure of income inequality ahead of Mexico and Turkey. Further, income inequality correlates with decreased social mobility, and it is projected that the failure of social programs to address the affects of the widening gap will have substantial negative socioeconomic affects for some time to come.

The full report is big bucks and rather long, but the press release can be accessed at the OECD here. A pdf version of the Trade Union Advisory Committee to the OECD summary has been posted courtesy of UNI here.

If you’ve got time, please, read it and pass it on.

Free Marketeering Is Contraindicated

Posted in Economics, Political Economy by equanimist on October 18, 2008

(Response to ‘Don’t Blame the “free market”’ by the Frugal Libertarian and Steven Horwitz’s Open Letter to My Friends on the Left)

A civil society (i.e., a socioeconomy in which authority is consolidated in stewardship, some portion of which legislate to effect order and minimize volatility – really a civil socioeconomy) is predicated on order. More civilized societies don’t necessarily have more laws, but more civilized societies are more highly ordered. Lawlessness is thus antithetical to civil society, so I shall not belabor the point.

Every civil economy presupposes a market within which reasonable people are willing to trade, an ordered market. To establish ordered markets within which reasonable people are willing to trade, trading partners must be convinced to trust that they will not be swindled (loosely defined, sold goods or services at some price above their worth).

If I am to take seriously advocates for a Free Market then I must assume that same define a Free Market as some minimally regulated market. US Capitalism may be (or those who regulate it may aspire to) just such a Free Market.

Federal, State and Local governments certainly have instituted myriad laws intended to establish the basic trust and even force fair dealing. These clearly proved inadequate. Still, that no law or laws prevented widespread abuse and malfeasance does not indicate utter deregulation (anarchy).

I have no confidence that either Sen. Obama or Sen. McCain will be able to effect policies that reestablish that trust. Neither do I expect that Congress people, whose job it is to craft legislation, will do so in the near term. The few qualified Senators and Representatives are simply outnumbered by idle bureaucrats, partisan hacks, ignoramuses and criminals. Howsoever, we must reestablish the basic trust. Should we fail every US citizen will bear responsibility for the failure.

So, I do not throw my hands up in frustration or rail against the man or any other counter-productive thing. Instead, I ask you, how can we re-inspire the basic trust?

You cannot have your cake and eat it too.

Posted in Economy, Political Economy, Public Policy by equanimist on October 4, 2008

Easy credit had a more insidious affect than falling home prices and high personal debt.

Now it seems crystal clear that easy credit within a context of open US border policies (including but not limited to insourcing talent, outsourcing work and hiring illegal immigrants for menial tasks – all  of which depress wages over a broad spectrum) and general US avarice (it seems absurd to talk about entitlement and fail to note that the top four percent have demanded an increasingly bigger piece of the pie for decades prompting the overwhelming question, “How many yachts can you water ski behind?”) must artificially depress wages.

The short of the long of it:

“The other half” (i.e., ninety-six percent or approximately
290 000 000 US Americans) sees how “the rich” live and the former must be wont to compare themselves to the latter – it is human nature or US culture. Advertising (which, more than letting consumers know about products, is designed and intended to persuade people to want/buy goods that they might not have wanted/bought) cannot be discounted. Further, it must be assumed that people would sooner avoid conflict (if it isn’t self-evident from the fact that we’re not big cats). Compliance is generally voluntary.

Organization and protest are hard. Credit, that’s easy. Did US citizens get credit instead of organizing and protesting falling wages?

Now that wages are artificially (extremely) depressed, credit is drying up, home prices are falling and human nature is what it is, what ought we to expect? What do people do when their livelihoods are threatened?

The passage of a bill funding Treasury in its reverse-bids to buy illiquid debt off of banks is all well and good for whomever gets to buy the debt back up on the cheap, but bad for the banks on fire-sale and probably irrelevant to the current crisis, especially when certain provisions make the fire-sale even less appealing (making so-called “price discovery” even less likely while simultaneously doing nothing to increase the likelihood that we will sooner-rather-than-later separate the wheat from the chaff). It’s no wonder that the market closed lower today. It’s a wonder it was up at all.

If President Bush has been right about anything, it is that this is a dire crisis. I reiterate: It didn’t start with easy credit or falling home values and resetting interest rates but began instead with falling wages and downward wage pressure – with which it got worse. It won’t be fixed until we find a new place on the socioeconomic continuum or find a way to effect a fast redistribution of wealth on an historical par.

This is a Private Drive. No Trespassing.

Posted in Political Economy, Public Policy, Socioeconomy by equanimist on September 17, 2008

Continued Fed bailouts will only put the bottom off. Systemic injury must be sustained or illiquid debt must indefinitely pass from hand to hand. The difference between a stricter Capitalist Fed and a Fed that socializes only losses is as follows: loss is not evenly distributed among financially responsible parties: the shrewdest financial minds have time to reposition themselves to avoid it (viz., financial loss).

Here, I would like to refer my readers back to the paper buried in a link within my first post below (December 2007) and to elaborate on its conclusions.

Illiquidity in the financial markets is only symptomatic of a disempowered (insolvent?) consumer. S /he must now be furnished real dollars from real coffers with which to make real purchases. To effect this a firewall must be erected. Outsourcing/insourcing must be dissuaded. Though there may be a myriad ways to do so, ensuring the reliability of shipments and adhering to a strict (extant) migration policy seem the most reasonable methods.

As previously suggested, the best way to ensure shipment reliability is to check every container and the actual contents thereof to ascertain with certainty whether or not those contents conform with US regulation, which (as evidenced by the recent troubles) cannot be done abroad in a manner consistent with US standards. This does not bar foreign investment in the US or unfairly tax anybody to socialize profits, but provides an adequate framework within the spirit of US tradition to protect US democracy from detractors foreign and domestic.

Further/likewise, insourcing must be nipped in the bud. It would be nice if living standards around the world suddenly raised but the global will does not yet exist and no minority group of nations can effect it by force. Ergo, careless optimistic globalization must be replaced by cautious nationalistic globalization.

The US economy will be made solvent or reposition itself on the broad socioeconomic continuum. Put another way, the US middle class will be re-empowered or the US socioeconomy will adjust. History makes the latter almost unthinkable.