A New Way Forward – Restore the Economy in the Public's Interest

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, pedal to the metal.

Cross-posted from Archein: iron and oil

Unemployment and inflation go up in Europe, and foreclosures and unemployment aren’t fitting into the boxes Wall St. thinking have created. From Economix, how we think about foreclosures is quite telling of how Wall St. runs our collective psyche. People default when they think they can get some money back, but don’t if all their previous payments are lost. That sounds about right according to the calculus in my head in regards to my durable goods.

Professor Olney found that defaults on such contracts were rare in the early 1930s: “Despite the layoffs, the wage cuts, and the unprecedented prevalence of installment credit use, families with installment debt were avoiding default” (pp. 321-2).

Later in the Great Depression, the rules for repossessing consumer durables changed, and consumers had to be given a refund of part of the payments they made prior to default. The incentive to repay installment debt fell, and Professor Olney found delinquencies and defaults on installment debt to rise.

Many people who lost their jobs in the 1930s still made their debt payments, as long as they had an incentive to do. Today homeowners with negative equity have little financial incentive to make their payments. By focusing so much on “affordability,” the Obama adminstration’s latest policies do little to prevent strategic default, and should not be expected to alleviate the foreclosure crisis.

Have you heard about the money we got from Citi? About $8 billion. Washington Post thinks it’s too much. Here’s 1115.org on the issue:

It’s not even the end of March, but I’m willing to back this against all comers for the dumbest statement we’ll read in a major newspaper all year:

Among the banks that rule Wall Street, Citigroup got a bailout that was bigger than the rest. Now the company is about to pay a king’s ransom for its federal rescue.

That’s David Cho of the Washington Post, and he really shouldn’t be allowed to write about stuff he simply doesn’t begin to understand.

In October and November 2008, Citigroup received more than $45 billion in TARP money, in two installments, in exchange for preferred shares. That package was later restructured. $20 billion was converted into a loan, and $25 billion was converted into common stock last September.

So now the government proposes to sell its entire equity stake in Citigroup. And because the stock price has gone up roughly a dollar in the last six months, the government stands to make a handsome profit:

The Obama administration is making final preparations to sell its stake in the New York bank, according to industry and federal sources. At today’s prices, the sale would net more than $8 billion, by far the largest profit returned from any firm that accepted bailout funds, and the transaction would be the second-largest stock sale in history.

On paper, the government’s 27 percent stake has grown in value to $33 billion. The size of the deal in the works has Wall Street buzzing.

And that, incredibly enough, is Cho’s entire argument. Because the government is making a $8 billion profit on the investment, Citigroup is paying a king’s ransom for its federal rescue.

We can only conclude that Cho simply doesn’t begin to realize that the $8 billion profit doesn’t actually come from Citibank’s pocket. That when a company’s stock price goes up, it is really not the norm to allege that the company’s stockholders have somehow succeeded in gouging the company.

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Is Krugman serious?

Government backing — the 21st-century version of deposit insurance — plus regulation so that the backed institutions don’t abuse the privilege is still the way to go.

Let me know.

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.

From Archein: locally globally

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 pretty much 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.

This past weekend, Pace University in New York City hosted Left Forum, a massive meeting ground for academics and activists working toward systemic progressive change.  While events like these can attract a segment of folks whose open-mindedness to pragmatic strategic thinking is somewhat limited, A New Way Forward was able to generate a lot of enthusiasm.  Activists and intellectuals alike were excited about the “break up with your bank” concept—as we already know, there is great potential to tap into popular support for this idea.

The beauty of the move your money campaign lies in both its ideologically broad appeal and its ability to empower individuals in a real way.  Proponents at both ends of our political spectrum strive to claim the virtues of responsibility and accountability as their own.  These are the main principles animating the movement for financial reform.  Only someone heavily invested in the perpetuation of a demonstrably corrupt, wealth-destroying regime could honestly oppose our goals.

Amid the diversity of voices at Left Forum—some espousing incrementalist reform, others radical structural change—one clear message stood out above the rest:  a movement will not go anywhere without concrete steps for individuals to act upon.  The plan to break up the banks offers this kind of direct path for people to use their own personal power.  Participation in strong collective actions like this is instrumental in reigniting the sense of civic agency that has long been slipping away from the members of our republic.  Inertia gained here can go a long way in combating the alienation so many of us internalize in this climate of broken politics.

There has been a declining faith in the country’s institutions.  Chief among them, as a prior post on this blog highlights, is our federal government.  We need to remind ourselves that institutions exist to serve people, not the other way around.  The public trust has been broken, and it is up to us to hold the perpetrators accountable.  There are only so many responses a sane person can have to the dizzying display of the financial system’s hubris and the government’s ensuing callousness.  Some do nothing, joining a dispirited majority; some would rather argue over the best way to bring about the destruction of the entire financial system than work on innovative ways to make the current system more accountable; and others, particularly elected representatives who refuse to take bold action, seek to diminish the crisis and maintain the status quo.  The only satisfying option, the only way to reassert control of a nation spinning out of control, is direct, concerted action.

A movement is growing.  ANWF and like-minded groups are the vanguards of a decentralized effort to restore accountability and sanity to the political and economic forces that dominate our social structure.  Striking directly at the institutions that have created such devastating harm while remaining unmoved by the consequences of their actions is our privilege and duty.

For those interested in further efforts to combat the insidious nexus of concentrated corporate wealth and our political system, I encourage you to learn about and join the Bull Moose Movement.

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.

Cross-posted from Archein: currencies