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

One is the loneliest number that you’ll ever do
One is the loneliest number that you’ll ever know
– Nilsson

WSJ:

The widely watched trial exposed the behind-the-scenes dealings

buy viagra without prescription online

of a once-prestigious hedge fund that gained access to highly sensitive information about, among other things, Goldman Sachs Group Inc. at the height of the financial crisis. The government put at $63.8 million the amount in illegal profits and avoided losses Galleon realized through the scheme.

Once jury foreman Robert Jirmnson confirmed they had reached a verdict, the judge’s deputy read the results. As the deputy, William Donald, announced 14 times that he was guilty, Mr. Rajaratnam looked straight at him without flinching.

14 counts! Don’t stop their Eric, tell the White House you need more attorneys. Insider trading — Phew — you could have half the Street behind bars in no time. Yes, it will hurt campaign fundraising, but tell them for every ten in jail, you guarantee another point in the election. Two points for Lloyd and Jamie alone.

As the Journal states,

The verdict marks one the most high-profile successful prosecutions of a financial giant since the convictions of Bernard Ebbers and Jeffrey Skilling, former top executives at WorldCom and Enron, respectively, last decade.
We now all know it was wrong to stop there, in fact it was tragic.

Reposting this because it is all too-significant. We have a moment here to rally against political corruption. Anyway you look at the graphs below, big corporations have moved into the higher echelons of political power, and size is a significant attibute or contributor. Tomorrow, there will be a break up the banks bill, which I believe is possibly the biggest reform to large corporations in 80 years.

(This post was formerly called “Too Big To Fail In Graphs”)

These images speak for themselves. Lobbying in the years leading up to 1999 for the repeal of the Glass-Steagall Act of 1933 (the Gramm-Leach-Bliley Act repealed G-S), which sought to protect people’s commercial deposits from being fodder for risky investments, was successful at helping to create new kinds of mergers and new kinds of bigness in the markets.

With the introduction of a new version of the Glass-Steagall Act by likes of Senator McCain, it’s a good time visit how big have these banks gotten since its repeal in 1999. With more time and resources, even more interesting graphs can be made — looking forward to any collaboration (just send me a note or leave a comment).

Obama knows that studies show that highly concentrated markets mean banks have more risk in their portfolio, right? He can lead the country with brilliant solutions to these problems.

I’ve taken graphs from around the web and overlayed when Glass-Steagall was repealed. I made the third graph below.

Thanks to Open Secrets.org and the Sunlight Foundation for their visualization of campaign contributions – see their full visualization here.

Thanks to Celent Researchers for their work on studying the efficiency of small banks and large banks.

Thanks to Celent for their oft-cited numbers on how much market concentration there is in the finance industry.

Top 5 banks hold 95% of derivatives and now look how many we have:

“Finally, the financial sector will become smaller and less leveraged. That is the only way the sector can be returned to soundness and profitability in the environment that is likely to prevail in the post-crisis period. However, such retrenchment has to be seen against the earlier growth of the sector. Let me mention a few figures in this connection. From 1990 to 2006, the GDP share of the financial sector in the broad sense increased in the United States from 23% to 31%, or by 8 percentage points. During the same period, the increase in the GDP share was in excess of 10 percentage points in the United Kingdom but significantly less – around 6 percentage points – in both France and Germany. Graph 3 shows the development of the share of the financial sector in GDP for selected major advanced economies since the middle of the 1980s. The figures on profits are even more striking. For example, the financial services industry’s share of corporate profits in the United States was around 10% in the early 1980s but peaked at 40% last year.” Thanks, Mar

Bring Out Your Dead

Dodd, Dorgan phew! The exodus of incumbent Democrats from the Congress gains steam and the new year’s just started. It’s getting to look like the scene in Monty Python’s Holy Grail, “Bring out your dead.” More than a few members should lean over and poke their colleague and see if they’re moving. No doubt, they’ll get a few, “I’m not dead yet.” Of course if you’ve seen the film, you know the answer to that, ” Yes he is, it won’t be long.”

Chris Dodd of course is a perfect example of what’s wrong with our politics. Nice enough fellow no doubt. He first got elected in 1974, probably one of the most infamous classes of Congress in American history. It delivered into Congress, the new young-turk post-New Deal Democratic generation. They were an historical accident. The Republicans were laying the foundations for what would be their three decades rule, but in ’74 briefly self-destructed under the leadership of Mistah Nixon. After two cycles, the Republican march would continue pretty much unabated for the next several decades, with the Clintons sneaking in under the largess of Mr. Perot, and then in the last two cycles meeting its demise with the complete exhaustion of the American people with Republican rule.

Chris Dodd was a Democrat in Republican times, part of generation that repudiated their past. The Democratic class of ’74 will go down as a particularly loathsome bunch. It was they who opened the party coffers to the quick and addictive fix of corporate money, and it was they who capitulated to the Reagan revolution, not for any particular public policy benefit, but simply electoral self-interest. They were the first generation of the professional political class — money and image is all that matters.

The piling of Democrats on the cart of dead is hard news for those thinking the last two elections were the foundation for a new decades long rule by the Democrats. But look at it this way, Rove thought he had ushered in a new 50 year reign for the republicans and it lasted just six, and really, if the Democrats weren’t the completely inept lot they are, they could have taken out Bush in 04.But again, it gets to the point, this is where we are, switching one broken party for another. We don’t have the decency to put one or both parties out of their misery, continuing to spend billions of dollars every two years putting on a charade and seemingly disappointed when we keep finding out it makes no difference.

On Money – III

Monetary theory when all is said and done, is little more than a vast elaboration of the truth that “it all comes out in the wash.” — J.M. Keynes, Treatise on Money

The question, what is money, is coming to the forefront of public attention due to the global financial situation. It is a question that reoccurs throughout history, getting put forth in times of great change and social disruption. It is a question that has no fixed answer. For in the end, money is the ultimate social construct. Thus, the underlying definition and value of any currency is derived from the structure, wealth, and stability of the society. Thus, changes in the American monetary system over the last several decades reveal not only changes in money itself, but of our entire political economy.

As a foundation for a more detailed discussion on money, I’m going to loosely utilize the categories and definitions provided by Keynes in his Treatise on Money, which if you’re interested, provides much food for thought and was the foundation for much subsequent monetary postulating. However, I don’t claim to be providing a strict interpretation of Keynes thought, nor arguments on his reasoning, I’ll leave that to our economic clergy. Rather, I hope to provide a foundation for the general public to look into an issue for which they’ve had no eduction. An issue that exerts tremendous power over every facet of their daily lives and society as a whole. An issue events reveal necessitates a new resolution for the benefit of both our immediate and long term collective futures.

Keynes begins his Treatise with a simple one sentence definition, “Money-of-Account, namely that in which Debts and Prices and General Purchasing Power are expressed, is the primary concept of a Theory of Money.” He then proceeds to take two volumes to discuss what exactly he means by that. When most of us think of money, we think first of our paper currency, that is the medium of exchange. However, this is a relatively small part of the money total. As Keynes makes clear, an understanding of total money is Money-of-Account, which would include all savings and debts, that is all accounts in the banking system, and in our present circumstances, the shadow banking system.

Money-of Account is comprised of a multitude of components determining the value of money. Understanding how price impacts money value is relatively straight forward. For example, if you are holding a $100 and the price of the goods you want to purchase rise to $120, you now really have 20% less money. The same works in reverse, if prices fell $20, you’d have 20% more money. Debt makes matters more complex and General Purchasing Power is an idea of much greater complexity. Keynes’ definition is simply, “We mean by the Purchasing Power of Money the power of money to buy the goods and services on the purchase of which for purposes of consumption a given community of individuals expend their money income.” His more detailed explanation of this shows how General Purchasing Power is based on everything from commodities to labor, that is, the wealth of a given society in general. All of which becomes much more complex when you look at not simply a closed national system, but a global system, such as we have, where individual currencies are nationally-based, but through trade constantly interact with other nationally based currencies.

So, basically the value of money is derived from the society itself, in a complex back and forth interchange that includes supply, debt, prices, and the wealth of the economy as a whole.

In our American system, money can be created two ways, either by the government or through the banking system. In a fiat currency system like ours, that is not based any any specific commodity or any other specific value, there is in theory no real constraint to how much money can be created. With the banking system, one constraint on money creation is holding reserves on each loan it creates. While for the government, money creation in the end comes down to a matter of faith, both of it’s people and the rest of the world. The value of money is never simply based on quantity, but also quality.

OK, hopefully, this has provided a few general terms and my simplifications will not be met with too much contention. Now, I’d like to divide money into two classifications which will help shed some light on the problematic situation we currently find ourselves. Money can be used for two things, investment or consumption. The latter of course is easier to define, as it simply means the purchasing of goods and services to consume. While investment, in theory, uses money to create future wealth for consumption, but this has become a much more complex affair over the last few decades.

One point Keynes hammers home again and again is investment needs to be tied to the rate of savings. He writes,

According to my own definition “sound credit conditions” would, of course, be those in which the market-rate of interest was equal to the natural-rate, and both the value and the cost of new investment were equal to the volume of current savings.

Over the last several decades in America we’ve seen a complete untying of the correlation between investment and savings. The savings rate has dropped through the floor, while “investment”, and here I mean the entire financial system, has risen through the roof. Now there’s plenty of reasons for how this came about, but I will argue this fundamental disconnect along with fundamental changes in the American economy have led to a incredibly unstable global currency system.

ben’s bet
Financial bubbles are certainly interesting phenomena, though it’s very difficult to predict when they will pop. For the last two and half decades, the American financial system was systematically deregulated
and we faced various bubbles. Each one progressively larger, each popping met pretty much the same way, increasing debt through the largess of the Fed and blowing up a new bubble in a larger sector. The
popping of the securitization, derivatives, and real estate bubbles led Chairman Bernanke to vigorously blow the largest bubble yet. This bubble grows across global currency and other financial markets. When
it pops and what the ramifications will be are the only questions.

Doug Noland at the Asia Times has a very good piece on the bubble as it expands across the globe. He writes:

I will suggest that 2009 marked a historic inflection point in global finance. I have argued that years of policy mismanagement led to the breakdown in the dollar reserve
“system” – that for more than 60 years worked (with varying success) to restrain global credit expansion. This year saw key inflationary/reflationary biases move decidedly from the “core” (the
US) to the “periphery” (notably China, Asia, Brazil, India and the “emerging” markets). Importantly, a discredited dollar and the prospect of ongoing US policy-induced currency devaluation created a backdrop of extraordinary market accommodation for “periphery” credit systems.

Bloomberg has a very good extensive piece on the specifics of the Chinese housing bubble. While, John Auther’s is back at the FT and has a nice
piece on the question of the renminbi and the dollar. A devaluing renminbi and a devaluing dollar are going to cause great concern in global markets, particularly for those reliant on manufacturing exports. However, it’s going to also create problems in financial markets and the FT has a piece saying the bond boys are beginning to get nervous. “The
world’s biggest investment funds are cutting exposure to US and UK government bonds amid fears that rising public debt and the withdrawal of central bank support for their economies could scupper the global recovery.”

In his Treatise on Money, Keynes made a strong differentiation between a monetary crisis and the more traditional investment crisis or what is commonly referred to as the Credit Cycle. Keynes wrote:

Moreover there is a further characteristic of great importance which differentiates monetary disturbances (whenever, that is to say, the monetary change is of a
quasi-permanent nature) from investment disturbances; namely that the former represents a passage from one equilibrium price-level to another, whereas the latter (even when the investment change is of a
quasi-permanent nature) is an oscillation about an approximately unchanged price-level.

I’m going to write more on money, but in short, Ben’s bet has forced the issue and we are now in a monetary situation and in the end it will require a new equilibrium in global
price-levels. The question is going to be how we get there, for the most alarming factor is global currency markets that evolved over the past four decades, under the same failed market theory that we
deregulated the rest of the financial markets, are completely untethered from any stop points or breaking, that is, they are very susceptible to wide and violent swings, for example if we were to get
another panic, this time in currency markets as occurred last fall amongst the global financial elite. Such an event would serve no one well, though no doubt in Keynes’ words represent a passage from one
equilibrium price-level to another.

the politics of political economy

I like Zero Hedge, it has some informative stuff. Couple days ago, they wrote a good
piece on Fannie and Freddie, except it was political poison. It fell into the bankrupt political categories of the past three decades. Basically, “See, the whole financial mess was the government’s fault.”

Matt Taibbi wrote an excellent response, and I can’t recommend it more. Taibbi does an excellent job of showing the despicable partnership between Wall Street and DC in looting the American economy. The nut:

This GSE story is a big one, but if it gets used as a path back to a
“The Market Reacted Rationally” version of history, we’re screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly
intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.

Jesse’s Cafe America riffs on Taibbi’s piece and gives it a little historical perspective:

Out of all of this will come something different, and most likely
something unexpected. Its an old story, one that replays over and over. The remedy is sound reason and the Constitution, but these forces have been in retreat for the past ten years at least. Reform and justice
have few friends while the looting of a generation is in progress.

And speaking of looting, Greider has a good piece at The Nation on the looting class’ attempt to pry open the last public vault, Social Security.