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Financial skeptic

Notes on "neoliberalism enforced" cruise to Frugality Island for 401K Lemmings

News Neoliberalism as a New Form of Corporatism Recommended Links Peak cheap Energy and Oil Price Slump Bulletin Rational Fools vs. Efficient Crooks: The efficient m hypothesis Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime
Neoliberal Attacks on Social Security Casino Capitalism Unemployment Inflation vs. Deflation Coming Bond Squeeze Notes on 401K plans Vanguard
401K Investing Webliography Retirement scams Stock Market as a Ponzy scheme Financial Sector Induced Systemic Instability Neoclassical Pseudo Theories The Great Stagnation Investing in Vanguard Mutual Funds and ETFs
OIL ETNs Peak Cheap Energy and Oil Price Slump Notes on 100-your age investment strategy behavior in rigged markets Chasing a trade The Possibility Of No Mean Reversion Junk Bonds For 401K Investors Tax policies
John Kenneth Galbraith The Roads We Take Economics Bookshelf Who Rules America Financial Quotes Financial Humor Etc

“When the capital development of a country becomes a by-product
of the activities of a casino, the job is likely to be ill-done.”

John Maynard Keynes

"Life is a school of probabilities."

Walter Bagehot

Neoliberal economics (aka casino capitalism) function from one crash to another. Risk is pervasively underpriced under neoliberal system, resulting in bubbles small and large which hit the economy periodically. The problem are not strictly economical or political. They are ideological. Like a country which adopted a certain religion follows a certain path, The USA behaviour after adoption of neoliberalism somewhat correlate with the behaviour of alcoholic who decided to booze himself to death. The difference is that debt is used instead of booze.

Hypertrophied role of financial sector under neoliberalism introduces strong positive feedback look into the economic system making the whole system unstable. Any attempts to put some sand into the wheels in the form of increasing transaction costs or jailing some overzealous bankers or hedge fund managers are blocked by political power of financial oligarchy, which is the actual ruling class under neoliberalism for ordinary investor (who are dragged into stock market by his/her 401K) this in for a very bumpy ride. I managed to observe just two two financial crashed under liberalism (in 2000 and 2008) out of probably four (Savings and loan crisis was probably the first neoliberal crisis). The next crash is given, taking into account that hypertrophied role of financial sector did not changes neither after dot-com crisis of 200-2002 not after 2008 crisis (it is unclear when and if it ended; in any case it was long getting the name of "Great Recession").

Timing of the next crisis is anybody's guess but it might well be closer then we assume. As Mark Twain aptly observed: "A thing long expected takes the form of the unexpected when at last it comes" ;-):

This morning that meant a stream of thoughts triggered by Paul Krugman’s most recent op-ed, particularly this:

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

As most 401K investors are brainwashing into being "over bullish", this page is strongly bearish in "perma-bear" fashion in order to serve as an antidote to "Barrons" style cheerleading. Funny, but this page is accessed mostly during periods of economic uncertainty. At least this was the case during the last two financial crisis(2000 and 2008). No so much during good times: the number of visits drops to below 1K a month.

Still I hope it plays a small but important role: to warn about excessive risk taking by 401K investors in neoliberal economic system. It designed to serve as a warning sign and inject a skeptical note into MSM coverage. There are not many such sites, so a warning about danger of taking excessive risk in 401K accounts under neoliberalism has definite value. The following cartoon from 2008 illustrated this point nicely

As far as I know lot of 401K investors are 100% or almost 100% invested at stocks. Including many of my friends. I came across a very relevant to this situation joke which nicely illustrated the ideas of this page:

Seven habits that help produce the anything-but-efficient markets that rule the world by Paul Krugman in Fortune.

1. Think short term.
2. Be greedy.
3. Believe in the greater fool
4. Run with the herd.
5. Overgeneralize
6. Be trendy
7. Play with other people's money

I would like to stress again that it is very difficult to "guess" when the next wave of crisis stikes us: "A thing long expected takes the form of the unexpected when at last it comes".

But mispricing of risk in 401K accounts is systemic for "overbullish" 401 investors, who expect that they will be able to jusp of the train in time, before the crash. Usually such expectations are false. And to sell in the market that can lose 10% in one day is not easy psychologically. I remember my feelings in 2001-2002 and again 2008-2009. That's why many people who planned to "jump" stay put and can temporarily lose 30 to 50% of value of their 401k account in a very short period of time (and if you think that S&P500 can't return to 1000, think again; its all depends on FED). At this point some freak out and sell their holdings making paper losses permanent.

Even for those who weathered the storm and held to their stock holdings, it is important to understand that paper losses were eliminated mostly by Fed money printing. As such risks remains as at one point FED might find itself out of ammunition. The fact that S&P500 recovered very nicely it does not diminish the risk of such behavior. There is no guarantee that the third crisis will behave like previous two.

Next crash will have a new key determinant: the attitude toward the US government (and here I mean the current government of Barack Obama) and Wall Street after 2008 is the lack of trust. That means that you need to hope for the best but prepare for the worst. Injection on so much money into financial system was a novel experiment which is not ended yet. So how it will end is anybody's guess. We are now in uncharted waters. I think when Putin called Bernanke a hooligan, he meant exactly this. Since Bernanke was printing money out of thin air to buy financial paper, his action were tantamount to shoplifting. In some way this probably is more similar to running meth labs inside Fed building. The system was injected with narcotics. Everybody felt better, but the mechanism behind it was not healthy.

The complexity of modern financial system is tremendous and how all those new financial instruments will behave under a new stress is unknown. At the same time in the Internet age we, the great unwashed masses, can't be keep in complete obscurity like in good old time. Many now know ( or at least suspect ) that the neoliberal "show must goes on" after 2008 is actually going strongly at their expense. And while open rebellion is impossible, that results in lack of trust which represents a problem for financial oligarchy which rules the country. The poor working slobs are told be grateful for Walmart's low (poverty-subsidized) prices. Middle class is told that their declining standard of living is a natural result of their lack of competitiveness in the market place. Classic "bread and circuses" policy still works but for how long it will continue to work it is unclear.

But nothing is really new under the sun. To more and more people it is now clear that today the US is trying to stave off the inevitable decline by resorting to all kinds of financial manipulations like previous empires; yesterday, it was the British Empire and if you go further back, you get the USSR, Hapsburg empire, Imperial Russia, Spanish empire, Venetian empire, Byzantium and Roman empire. The current "Secretary of Imperial Wars" (aka Secretary of Defense) Ashton Baldwin Carter is pretty open about this:

“We already see countries in the region trying to carve up these markets…forging many separate trade agreements in recent years, some based on pressure and special arrangements…. Agreements that…..leave us on the sidelines. That risks America’s access to these growing markets. We must all decide if we are going to let that happen. If we’re going to help boost our exports and our economy…and cement our influence and leadership in the fastest-growing region in the world; or if, instead, we’re going to take ourselves out of the game.”

For the US elite it might be a time to rethink its neocon stance due to which the US is exposing ourselves to the enmity of the rising economic powers, and blowing serious cash to maintain it hegemony via maintaining huge military budget, financing wars and color revolutions in distant countries. In a way the US foreign policy became a financial racket, and racket can't last forever because it incite strong opposition from other countries.

Neoliberalism (aka casino capitalism) as a social system entered the state of decline after 2008. Like communism before it stopped to be attractive to people. But unlike communism it proved to have greater staying power, surviving in zombie state as finanfial institutions preserved political power and in some cases even enhanced it. It is unclear how long it will say in this state. Much depends on the availability of "cheap oil" on which neoliberal globalization is based.

But the plausible hypothesis is that this social system like socialism in xUSSR space before entered down slope and might well be on its way to the cliff. Attempts to neo-colonize other states by the West became less successful and more costly (Compare Ukraine, Libya and Iraq with previous instances of color revolutions). Some became close to XIX century colonial conquests with a lot of bloodshed (from half million to over a million of Iraqis, by different estimates, died ). As always this is mainly the blood of locals, which is cheap.

Libya and Ukraine are two recent examples. Both countries are now destroyed (which might be the plan). In Ukraine population is thrown in object poverty with income of less that $5 a day for the majority of population. And there is no other way to expand markets but to try to "neo-colonize" new countries by putting them into ominous level of debt while exporting goods to the population on credit. That is not a long term strategy as Greece, Bulgaria, and now Spain and Portugal had shown. With shrinking markets stability of capitalism in general and neoliberalism in particular might decrease.

Several researchers points to increased importance Central banks now play in maintaining of the stability of the banking system. That's already a reversal of neoliberal dogma about free (read "unregulated") markets. Actually the tale about "free markets", as far as the USA is concerned, actually was from the very beginning mainly the product designed for export (read about Washington consensus).

See also


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[Feb 08, 2016] Tech stock collapse sure looks like bubble popping

finance.yahoo.com

Almost all technology stocks are getting hammered yet again on Monday. Salesforce.com (CRM) was down 6% while Facebook (FB) and Microsoft (MSFT) had lost 3%, for example, in morning trading.

And while many see it as a continuation of Friday's rout sparked by LinkedIn's (LNKD) weak outlook for the rest of the year, the damage has been piling up for weeks. Investors are fleeing almost all tech names over concerns about the slowing global economy in general and a reassessment of the potential growth of online and "cloud" markets more specifically.

LinkedIn, pummeled by an unprecedented 44% one-day loss Friday, was one of the few tech stocks rising on Monday, as bargain hunters pushed its shares up 3% in early trading. Still, the shares have lost more than half of their value since the end of 2015.

The widespread tech crash is all the more surprising because almost everyone thought there was no bubble in the tech sector. Last year's market for initial public offerings of tech companies was the slowest since 2009 (and performed poorly throughout the year), slightly more seasoned public tech companies appeared to have already crashed last spring and most of the big tech companies, such as Apple (AAPL), IBM (IBM) and Cisco Systems (CSCO), trailed the market and appeared undervalued by historical measures. Only the so-called FANG stocks -- Facebook, Amazon (AMZN), Netflix (NFLX) and Google's Alphabet (GOOGL) -- did well, with an average return of 83% each in 2015.

But, it turns out, there was still plenty more downside risk to go around. LinkedIn is still off by more than 40% since it reported earnings after the market closed on Feb 4. Although fourth quarter adjusted earnings per share of 94 cents and revenue of $862 million beat the average Wall Street analyst estimate, the professional social networking company said it would earn only 55 cents on revenue of $820 million in the next quarter. And for the full year of 2016, revenue of $3.6 billion to $3.65 billion was less than the $3.9 billion Wall Street had been expecting.

Such a modest disappointment has sparked a massive reassessment of the potential for many Internet stocks. With investors in a panicky mood, the carnage has spread across much of the tech sector but stocks with online business strategies similar to LinkedIn's have been hit especially hard. Workday (WDAY), which provides online software for human resources, was down 7% midmorning on Monday and 37% for the year. Twitter (TWTR) lost 4% and was down 35% for the year. And Adobe Systems (ADBE) was off 5% on Monday and 20% for the year. A daily index compiled by venture capital firm Bessemer Venture Partners of 47 publicly traded cloud software stocks lost 17% just on Friday.

And those famous FANG stocks? They're all down in 2016, as well. After its 3% Monday drop, Facebook was still best of the bunch, showing a modest 4% loss for the year. Amazon was also down 3% on Monday but carries a crushing 28% loss for the year. Netflix was a rare gainer, up 1%, but still off 27% for the year. And Google was down 1% on Monday and 11% for the year.

[Feb 08, 2016] Momo Bad News JPMs Quant Guru Kolanovic Confirms Tech Bubble Has Burst... Again

Zero Hedge
Just over two weeks ago, JPM's Marko Kolanovic, whose unprecedented ability to predict short-term market moves is starting to seem a little bizarre, warned that the next "significant risk for the S&P500" was the bursting of the "macro momentum bubble." Specifically, he said that there is an emerging negative feedback loop that is "becoming a significant risk for the S&P 500" adding that "as some assets are near the top and others near the bottom of their historical ranges, we are obviously not experiencing an asset bubble of all risky assets, but rather a bubble in relative performance: we call it a Macro-Momentum bubble ."

In retrospect, following tremendous valuation repricings of several tech stocks, last week's LinkedIn devastation being the most notable, he was once again right. And over the weekend, he did what he has every right to do: take another well-deserved victory lap.

This is what he said in his February Market Commentary: " Tech Bubble Burst ?"

In our 2016 outlook and recent reports, we identified a macro momentum bubble that developed over the past years. We explained its drivers (central banks, passive assets/momentum strategies, etc.) and called for value to outperform momentum assets. We also highlighted the risk of a bear market and recommended increasing exposure to gold and cash as well as increasing exposure to nondollar assets relative to the S&P 500 (EM Equities, Commodities, Value Stocks, etc.). Our view was that a likely catalyst would be the Fed converging toward ECB/BOJ (rather than proceed with planned ~12 rate hikes by end of 2018). In line with these published forecasts, the best performing assets YTD have been Gold (+9%) and VIX (+20%) while S&P 500 and DXY are down (-7%, and -2%, respectively). Momentum stocks are down more than 10% with an acceleration of the selloff in last days. Emerging Market and Energy stocks are starting to outperform the S&P 500 (MSCI Latin America by +5% and Energy by +1% vs. S&P 500 YTD). This specific pattern of asset moves is consistent with a Value-Momentum convergence. We think the outperformance of value assets over momentum assets is likely to continue .

Investors often ask us how significant are distortions and risks in equity sectors that are related to a "macro momentum bubble." Specifically, the question is that of valuations in the Technology sector, i.e., "is there a Tech bubble"? Before we share our views, let's first review how passive investing and momentum strategies may have impacted performance of various equity sectors.

Imagine a world in which most of the assets are passively managed and investors are focused on liquidity and short-term risk/reward. Companies that increased in size recently would keep on increasing, and those that got smaller would see further outflows. Past winners would also be considered low-risk holdings compared to past losers. The most successful managers would be those that replace fundamental valuation with a simple rule: buy what went up yesterday and sell what went down. Passive funds would do the same. It is hard to imagine this makes economic sense long term, but it is close to what equity markets experienced over the past several years. In 2013, the Sharpe ratio of the S&P 500 was ~2.7. Assuming a normal distribution of active asset returns, one could (incorrectly) conclude that being just an average (passive) investor one will outperform ~95% of all active investors. In 2014 and 2015, various momentum strategies delivered Sharpe ratios >2. The winning strategy was not just to go with the crowd, but to do what the crowd did yesterday. This type of trend following does not only apply to extrapolating price trends, but also extrapolating trends in fundamental stock data such as growth and earnings. Beyond a certain point, passive investing and trend following are bound to result in distorted equity valuations and misallocation of capital.

While some parts of the Technology sector certainly have reasonable and even low valuations (see our US equity strategy outlook), segments of the Tech sector disproportionally benefited from momentum investing as well as investing based on extrapolation of past growth rates . For instance, a popular group of stocks held by investors is known by the abbreviation "FANG" (Facebook, Amazon, Netflix, Google). We use these stocks as an illustration for a broader group of similar stocks that have the highest rankings according to momentum and growth metrics (and surprisingly in some cases even low volatility metrics). Given that traditional value metrics look expensive when applied to this group, one can compare these momentum/growth companies on a new set of metrics. For instance, one can look at the ratio of current price to earnings that the company delivered over all of its lifetime (instead of just the past year). Another metric could be a ratio of CEO or founder's net worth to total company earnings delivered during its lifetime (see below):

Aggregating all FANG earnings since these companies were listed, one arrives at a ratio of current price to all earnings since inception of ~16x. This can be contrasted to a ratio of price to last years' earnings for all other S&P 500 companies also at ~16x. We think this is extraordinary given that FANGs are neither small nor new companies. In fact, these are some of the largest companies in the S&P 500 and among the largest holdings of US retirees. Given that the three largest FANG stocks are now twice more valuable than the entire US S&P small-cap universe (600 companies), a legitimate question to ask would be " is such a high allocation by long-term investors to these stocks prudent?" Statistically, over a long period of time smaller companies outperform mega-caps ~75% of times. Note also that the current size ratio of mega-cap stocks to small-cap stocks is at highest level since the tech bubble of 2000. Furthermore, such allocation is also questionable from a risk angle . For example, the idiosyncratic risk of holding three stocks in one sector is certainly much higher than the risk of owning, e.g., ~1,000 medium- or small-cap companies diversified across all sectors and industries.

Investors in high-growth stocks expect innovations to drive growth and sustain high valuation. They may even put their hopes in moonshot projects such as cars built by electronics makers, car makers building spaceships, or internet companies building drones. While many of these could result in important technological breakthroughs, they may also be signs of excess and destruction of shareholders' capital in the future. Recent examples of capital impairment in the tech sector are illustrated here and here, and more peculiar examples of past excess can be found here and here. In addition to extrapolated and often optimistic growth forecasts, some of the tech sub-industries have high idiosyncratic risks that are likely underappreciated by the market. Standard valuations models incorporate revenue, growth, and profit forecasts but often do not discount for the lifecycle risk of a business. To illustrate: while we are still traveling in aircraft designed over 40 years ago, social network users' preferences have changed drastically over the past decade (e.g., Friendster and Myspace). A shorter lifecycle is related to low barriers to entry and rapid changes in what is deemed fashionable by young generations (e.g., one cannot build a jetliner in a dorm room, and they don't go out of fashion as apps do).

In summary, we think that the biases of momentum investing and passive indexation have resulted in valuation distortions across assets as well as equity segments including Technology . Over the past years this trend has picked winning assets, sectors, and stocks often with less regard to fundamental valuation and more regard to momentum and extrapolated growth. We believe that 2016 may result in a reversion of this trend that will give an opportunity to active and value investors to outperform passive indices and momentum investors . Even if this rebalancing comes as a result of market volatility and broader equity declines, long term it will benefit capital markets and the efficient allocation of capital .

* * *

Only problem is that this capital reallocation will means countless momentum chasers 'smart money managers' will be out of a job in very short notice.

Then again, judging by some initial reactions, even formerly steadfast believers in the FANGs are starting to bail: moments ago CNBC reported that Mark Cuban announced that he purchased options to sell against his entire stake in Netflix, to wit: "For those of following my stock moves, I just bought puts against my entire Netflix position. "

Cuban posted comments on Cyber Dust social media platform on Friday. Result: NFLX already down -4%, with FB and other tech momos hot on its heels.

[Feb 08, 2016] GRANTHAM The stock market sell-off makes me nervous, but I fear the big crash is coming later

finance.yahoo.com

In his latest quarterly outlook, Grantham, cofounder and chief investment officer at GMO, outlines his views on the markets and the economy.

And in somewhat of a contrast to his recent commentary, sees the oil crash as a big tailwind for the economy and doesn't think the stock market, though it is expensive and potentially heading into a bear market, is going to crash.

"Looking to 2016, we can agree that uncertainties are above average," Grantham writes.

"But I think the global economy and the U.S. in particular will do better than the bears believe it will because they appear to underestimate the slow-burning but huge positive of much-reduced resource prices in the U.S. and the availability of capacity both in labor and machinery."

Grantham adds (emphasis ours):

As always, though, prudent investors should ignore historical niceties like these and invest according to GMO's rather depressing 7-year forecast. The U.S. equity market, although not in bubble territory, is very overpriced (+50% to 60%) and the outlook for fixed income is dismal.

At current asset prices no pension fund requirements can be met. Thus, we should welcome a major market break that will leave us with more reasonable investment growth potential for the longer term, but I suspect that we will have to wait patiently for such a major decline.

The ability of the market to hurt eager bears some more is probably not exhausted. I still believe that, with the help of the Fed and its allies, the U.S. market will rally once again to become a fully-fledged bubble before it breaks. That is, after all, the logical outcome of a Fed policy that stimulates and overestimates some more until, finally, some strut in the complicated economic structure snaps. Good luck in 2016.

OK, so maybe not bullish, per se, but Grantham is definitely sounding the alarm on not sounding the alarm on a stock market bubble and resulting crash.

Stocks

Over the last 18 months, stocks are basically flat in what has been by far the most difficult period for investors since the financial crisis.

And this period has really been defined by three things: a crash in oil prices, a continued and relentless slowing of the Chinese economy, and a change in Federal Reserve policy.

On top of all this is the decline in profit margins, which Grantham has called the "most mean-reverting series in finance," implying that the long period of elevated margins we've seen from American corporations is most certainly going to come an end. And soon.

Profit margins are near record highs, and Grantham expects them to fall.

In Grantham's view the Fed holding off on raising rates all the way until December 2015 staved off what could have been a really disastrous year for stocks given the weakness in oil prices and anxiety over China's economy.

And continued assistance from the Fed is likely to send stocks higher, or at least stabilize them somewhat.

The question, then, is whether this sends stocks into a "blow-off-top" where, as Grantham outlines, you'd expect to see a two-standard-deviation event with stocks rocketing higher and the S&P 500 heading to 2,300 before the big crash.

"I must admit to feeling nervous for this year's equity outlook in the U.S," Grantham writes. "But I am not entirely convinced. Sure, we can have a regular bear market. That is always the case. But the BIG ONE? I doubt it."

Oil

In addition to not being (overly) concerned with the prospects of a new stock market crash, Grantham also thinks we're about to see the good side of the oil crash that has been a long-awaited part of the US economic narrative in the last year.

"The largest hits from the major oil company responses are behind us, although at $30/barrel (and maybe less) there will be some further retrenchment," Grantham writes.

The oil crash, charted.

He adds: "And now comes the matching response from us, the consumers. Everything we buy has cheaper input costs. The major item of gasoline purchases is a steady jolt of encouragement. Heating bills are also much lower. Could there be a better financial input than this to the group that has been hurting for 30 years - the median wage earner? Not easily."

This is good!

Everything, it seems, is getting cheaper, and according to the latest data out of the BLS released Friday, our paychecks are getting bigger as average hourly wages grew 2.5% over last year in January, roughly matching the largest increase of the current economic cycle (December's gains were revised higher to show annual growth of 2.7%.)

But Grantham goes a step beyond the standard, "Low oil means more spending for consumers" line of thinking (which is why he's one our favorite market thinkers to track).

Grantham further argues that increasing commodity prices, as much as anything else, have been and will be factors ahead of recessions.

Because while 2008 was all about the crash in housing and the stress at major banks, the rapid rise in oil prices and other commodities stressed consumers as much as anything else, in Grantham's view.

And just as this rise was overlooked eight years ago, the crash in prices and the delayed - but positive - feedback to consumers and the economy has been forgotten by the market.

But the benefits are coming. Now.

"Market opinion now, though, impressed with the early negatives that it should have expected and because the offsetting stimulus effect is delayed and weakened initially by some understandable increases in savings, is doing the opposite," Grantham writes.

"[The market] is underrating what will very likely become an important economic tailwind for the next several quarters. Reflecting current opinion, Luke Kawa, a writer for Bloomberg reviewing the oil situation claims, 'One of the biggest surprises in economics has been how the world responded to a period of lower energy prices.' Well, the economic world is easily surprised."

Read Grantham 's full note here " gmo.com

[Feb 04, 2016] Pitchfork Time Elites Have Lost Their Healthy Fear Of The Masses Zero Hedge

Notable quotes:
"... Is it time for pitchforks to restore the natural orders of fear yet? ..."
www.zerohedge.com

Zero Hedge

The following reader comment, posted originally in the FT is a must read, both for the world's lower and endangered middle classes but especially the members of the 1% elite because what may be coming next could be very unpleasant for them.

Elites have lost their healthy fear of the masses

Sir, Martin Wolf (" The losers are in revolt against the elite ", Comment, January 27) and Andrew Cichocki ("Elites are listening to the wrong people ", Letters, January 29) skirt the key issue: global elites have lost a healthy sense of fear.

From the time of the French Revolution until the collapse of communism, what successive generations of elites had in common was a sense of fear of what the aggrieved masses might do . In the first half of the 19th century they worried about a new Jacobin Terror, then they worried about socialist revolution on the model of the Paris Commune of 1871. One reason for the first world war was a growing sense of complacency among European elites. Afterwards they had plenty to worry about in the form of international communism, which remained a bogey until the 1980s.

With the collapse of the Soviet Union and the spread of global capitalism, today's elites have lost the sense of fear that inspired a healthy respect for the masses among their predecessors . Now they can despise them as losers, as the aristocracy of ancien régime France despised the peasants who would soon be burning their châteaux. Surely today's elites are going to learn how to fear before we see any reversal of the recent concentration of wealth and power.

Is it time for pitchforks to restore the natural orders of fear yet?

h/t @ WallStCynic

Looney

Is it time for pitchforks to restore the natural orders of fear yet?

Oh, honey, I thought you'd never ask… ;-)

Goliath Slayer

How they turned us into Pavlov Dogs >> http://wp.me/p4OZ4v-1zD

Stuck on Zero

It's hard to get rid of most of the elites because they have tenure.

tarabel

And most people wouldn't have the faintest idea of where to buy, or more probably rent, a pitchfork anyhow. As for torches? What, are you crazy? Those things are dangerous and would void our insurance policy.

bamawatson

will goldman sucks n shitty bank loan me money to purchase a pitchfork? http://theconservativetreehouse.com/2016/02/03/update-fec-informs-ted-cr...

MayIMommaDogFac...

REALLY LONG pitchforks!

rocker

I'd like a Cattle Prod. You got to believe Homeland is reading this one.

Future Jim

Elites are afraid of socialism and communism?!

The Elites are the ones who created and spread such collectivism because collectivism is how they control the masses, and they make the masses think they are afraid of it so that the masses will demand it. The masses demand to be enslaved by socialism and communism. They are being played.

Elites only fear the free-market. That is why we don't have one.

AldousHuxley

It really doesn't matter what *ism society embraces. What matters more is is the power elite greedy enough to sell out their own kind?

Future Jim

If you think that freedom is just another ism, then you have been played.

It is not about greed. It is about power and control. Money is just a means to that end.

Their own kind? You mean their own race ... their own nation ... their own religion ... ?

CapnJackDaniel

Nice, but a little quick donchathink?

Cadavre

And a roasting spit and rope to tie em by the ankle to the cherry trees lining the national mall, Musollini style. Urinals hanging from cherry trees. Only in America.

One does wonder how inbreds surrounded by expensive advisors so easily lost any shred of fight-o-flight survival skills. Guess the extra bling allows them to dream false dreams.

eforce

The ones who think they are 'top dog' are about to find out the hard way, there is something much bigger at work...

"6. The people, under our guidance, have annihilated the aristocracy, who were their one and only defense and foster-mother for the sake of their own advantage which is inseparably bound up with the well-being of the people. Nowadays, with the destruction of the aristocracy, the people have fallen into the grips of merciless money-grinding scoundrels who have laid a pitiless and cruel yoke upon the necks of the workers.

7. We appear on the scene as alleged saviours of the worker from this oppression when we propose to him to enter the ranks of our fighting forces - socialists, anarchists, communists - to whom we always give support in accordance with an alleged brotherly rule (of the solidarity of all humanity) of our social masonry. The aristocracy, which enjoyed by law the labor of the workers, was interested in seeing that the workers were well fed, healthy, and strong. We are interested in just the opposite - in the diminution, the killing out of the goyim. Our power is in the chronic shortness of food and physical weakness of the worker because by all that this implies he is made the slave of our will, and he will not find in his own authorities either strength or energy to set against our will. Hunger creates the right of capital to rule the worker more surely than it was given to the aristocracy by the legal authority of kings.

8. By want and the envy and hatred which it engenders we shall move the mobs and with their hands we shall wipe out all those who hinder us on our way."

--The Protocols

freak of nature

Fear might be masked, but it's still there.

http://www.washingtontimes.com/news/2015/sep/30/angela-merkel-caught-on-...

Memedada

http://www.rense.com/general45/proto.htm - they're fake.

eforce

You're fake.

Mr. Universe

The thing is that there are going to be a LOT of folks who thought they were elites. Instead they will be thrown under the bus of the approaching hoards to slow them down while the real elites make sure no one escapes that shouldn't be.

They no longer fear the masses as they control the cops and the narrative. What will really work and is almost unstoppable is the ghost in the machine. Seemingly random acts of sabotage, just think if the internet went down for even 2 or 3 days. Who would it hurt most, average folk or ? I have a dream...

css1971

Sternly worded letters will be flying thick and fast.

indygo55

A torch might mess up my nails

tarabel

And you'll need new shoes cause those definitely don't match.

wildbad

https://www.youtube.com/watch?v=USk-ECjYEhI

Lorca's Novena

Lol those guys are so blackwater.... It is illegal to have a standing "army" on 'murrican soil. Private for hire jagoffs arent. And no, it wasnt the national guard.

Chris Dakota

60% of the people who live in Burns work for the BLM.

Looney

Oops! ;-)

alexcojones

I think Pitchforks are way too tame. If this patriot lived today he would be decalared a TERRORIST

The First Hero of the American Revolution

Mark Mywords

" Surely today's elites are going to learn how to fear before we see any reversal of the recent concentration of wealth and power."

Surely, you jest. The proles won't attack the elites. They won't be able to find them, or get to where they live.

Tyler(s), you need to stop posting such meaningless tripe. When the serfs rise up, they will attack what is around them. As always.

bbq on whitehou...

The internet doesnt forget or forgive transgressions. Sins of the father shall be paid for by their sons.
"Where are you going to run, where are you going to hide; no where because there is no where left to run to." - Body snatchers

tarabel

I think you are correct so far as you take your argument. Yes, they will START on their own neighborhoods.

The depth of the fall can be graphed against how far they will go afterwards.

El Vaquero

Then we just cut their supply lines.

knotjammin2

It is our son's and daughter's who protect the elitist assholes. We know where they built their bugouts and landing strips. We built them. We know where the air vents are for their underground bunkers. We built them. We know where the diesel tanks are to power their generators and you can't hide solar panels. No, we know where there going and how to get to them. Soon!!

Mr. Universe

Now you know why the hawaiian's, when they sent a worker down the side of a cliff to bury the chiefs bones in that space reserved for the Ali'i, they "accidently" let go of the rope while he was climbing back up...oopppps, sorry bout 'dat brah.

indygo55

"The proles won't attack the elites. They won't be able to find them, or get to where they live."

Oh you mean like the French Revolution or the Chinese Revolution? Like that?

HardAssets

No, the proles do little of substance. But, the time is reached when even their paid off guard dogs will be tired of the insanity that destroys their own extended families. (The psychopaths can't help but push it to the extremes. That is their egotistical nature. Theyve been indulged since they were infants.) When that day of reckoning comes, the criminals will be very afraid.

The EU 'leadership' bringing in massive outside foreign populations to destroy the existing culture and nation-state is a potential match for the fuse of anger. We see police carrying out orders, but what do they really think ? How bad will they let it get ? Even the Red Army troops refused to go along with it all when the grandmas scolded them for taking part in rolling the tanks toward their own people. And those troops said "Nyet, no more of this." And the USSR was no more.

conraddobler

Maybe they haven't played a lot of sims?

I used to love the old sims of feudal japan where you could set your tax rate at whatever you wanted but the higher you set it the more likely you would get a peasant revolt.

What's going on is precisely this:.....

They have learned how to set the tax rate at whatever percentage won't cause utter chaos and then absolve themselves from said taxes through loopholes AND THEN add on top stealth taxes in the form of currency debasement AND THEN on top of all this they've built a ponzi scheme debt based fiasco that is entirely unsustainable.

I gotta hand it to them they have managed so far to avoid the ire of the peasant class, however methinks that once this shit show rolls into town and starts playing nightly as in reality comes a callin then these same folks are going to need to hide off planet.

Seriously I'd advise them to look into space travel.

DipshitMiddleCl...

The elites today were related to the elites of yesterdays revolutions

They have learned and are keeping track of everything and with the advent of big data and lots of computing power, they know how much time they have before SHTF.

They have quants assessing risk daily, and not just market risk..geopolitical and other stuff.

They dont fear us because they know they can keep ramping up poisoning of our food and other stupid social media gimmicks.

If all else fails, the jackboots will come out in full force.

They've been testing and training these detention methods for close to 100 years. From the gulags of Russia to the West Bank / Gaza strip today of Israel.....its being tried and trued.

And we're next!

~DipshitMiddleClassWhiteKId

carlnpa

The past nine months have set record monthly background checks. I believe we as a "group" know and feel our existence is in danger, and are responding accordingly.

alexcojones

Certainly a patriot CANNOT do it through the ballot box,

Iowa: Days before the Iowa caucuses in 2012, Ron Paul held a commanding lead in the polls and all the momentum, with every other candidate having peaked from favorable media coverage and then collapsed under the ensuing scrutiny. Establishment Republicans, like Iowa's Representative Steve King (R), attempted to sabotage Paul's campaign by spreading rumors he would lose to Obama if nominated. . . Iowa Governor Terry Barnstad told Politico , "[If Paul wins] people are going to look at who comes in second and who comes in third. If Romney comes in a strong second, it definitely helps him going into New Hampshire". The message from the Iowa Governor to voters of his state was: a vote for Ron Paul was a wasted vote.

How t he Republican Party Stole the Nomination from Ron

August

The RNC and their minions would have prevented a Ron Paul pesidential nomination, by any means necessary - up to and including a terrible, just terrible, plane crash. All those lives lost....

pipes

They DID prevent the nomination by any means necessary...and did so, short of crashing a plane. The underhanded shit they pulled in '12 sealed their fate. Kirk2NCC1701

In that case, the Libertarian Party needs to go "full Zio-mode": Take no BS and no prisoners.

Problem is, they are too "individualistic" (divided, heterogenous), and too 'Christian' (raised in "Religion of Serfs") to create another American or French Revolution, or bring about real change.

Note that in the American Revolution, its Founders realized that the influence of Clerics needed to be curtailed, and so they invented the "Seperation of Church and State". The French, OTOH, called a spade a spade, and got rid of the Church completely.

Amerika: Where kids are taught by their parents to believe in the Tooth Fairy, Easter Bunny and Santa Claus -- all the while they believe in "Santa for Grownups", i.e. Winged Nordic Humans (Angels) and a Sky God.

I have ZERO faith that Libertarians will do anyting, other than talk, blog, hold meetings, conventions, have weekend warrior games, or buy any number of Doomsday Products and Services. IOW.. they'll do anything and everything, but March or Protest en mass. They won't even do TV program, much less do a leveraged buyout of a TV channel.

Like I said: "Too individualistic, to truly matter to TPTB". I WISH it were not to, but I'm just calling it as I see it. Alas. If I'm wrong, I'll jump for joy and click my heels.

alexcojones

BTW - Fuck Iowa

And thank you Stanford for Stomping them in the Rose Bowl

Pitchfork Voting Machines

all-priced-in

Do they have to get off the sofa or can they just send it in on Instagram?

[Feb 01, 2016] Faber Cant see another bull market in my lifetime

www.cnbc.com

Faber: Can't see another bull market in my lifetime

Jacob Pramuk | @jacobpramuk
Wednesday, 27 Jan 2016 | 10:12 AM ET
CNBC.com

The world according to Faber</p> <p>Marc Faber, The Gloom, Boom &amp; Doom report, joins Fast Money to give his take on the current market conditions.

Emerging market stocks will outperform U.S. equities when another bull market comes, noted bear Marc Faber contended Tuesday. But Faber sees one problem - he believes markets will not enjoy another bull run in his lifetime.

Still, the Gloom, Boom & Doom Report publisher sees a potential recovery for some emerging market economies, particularly Russia and Brazil, which have endured a recent slowdown.

"There are some that are extremely depressed that could have large rebound potential," Faber said during a Tuesday evening panel discussion at the ETF.com Inside ETFs conference in Hollywood, Florida.

Stock prices have broadly fallen worldwide this year, with lower commodities prices and fears of a global slowdown contributing to investor concerns. Economies dependent on natural resources have been hit particularly hard. Brazil and Russia, once stars of the emerging world, have been damaged by oil as well as political issues.

While Faber has made a name on pessimism, he contended that bright spots for potential growth still exist in emerging markets. He pointed to Cambodia and Vietnam, among other Asian economies.

Mark Yusko, chief executive officer of Morgan Creek Capital Management LLC.
Guy who called $30 oil year ago has more bad news

"I wouldn't take an across-the-board negative view about emerging economies," Faber said.

Another investor on the panel Tuesday stressed that market watchers should not package all emerging economies into one basket. Marten Hoekstra, CEO of Emerging Global Advisors, is particularly optimistic about growth prospects for India, the world's second-most populous country.

His funds have attempted to benefit from consumer demand there through consumer discretionary and staple stocks, as well as health care, telecom and utilities companies. While Emerging Global's India Consumer ETF (INCO) has fallen this year, Hoekstra touted its prospects for long-term investors as consumer spending power grows in India.

Bill McNabb, chairman, president and CEO of Vanguard Group
Vanguard CEO: Expect less from stocks for a decade


He stressed that the Indian economy does not rely on oil or natural resources, which reduces its downside risk if the commodities crunch persists.

"If you're generally negative on oil, you're probably bullish on India," Hoekstra said.

Mark Yusko, founder and CEO of Morgan Creek Capital Management, said during his annual "bold predictions" talk on Monday that India had attracted his attention and would perform better than most emerging economies.


Despite Hoekstra's optimism, widely followed commodities commentator Dennis Gartman, who was also on the panel Tuesday, said that he had no immediate plans to invest in emerging market economies.

"It is the continued reliance upon commodity prices that causes me a great deal of concern," he said.

Gartman contended that corruption in some emerging market governments reduces the safety of investing in those locales.

[Jan 30, 2016] How Central Banks (and Even Keynes) Misled the Public About Banking and Money

Notable quotes:
"... By Perry Mehrling, a professor of economics at Barnard College. Originally published at his website . ..."
"... Yes, the money creation process has been a big lie for a long time. In any case the Bank of England came clean a couple of years ago and admitted that standard story of money creation was false. They even acknowledge that it is not properly explained in most money and banking textbooks, which is a staggering admission. ..."
"... Paul Krugman wrote a column a couple of months ago where he claimed that banks take in savings from depositors and lend them out to borrowers which tells you either: 1) he doesnt know how banking works or 2) he is part of the conspiracy to keep the public in the dark. ..."
"... The truth right from the mouth of the worldss oldest central bank. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf ..."
"... Yeah, I saw that. It is amazing that a supposedly foremost Princeton Nobel winning economist apparently doesnt understand where money comes from… ..."
"... There is evidence that Krugman seems to have great difficulty admitting he was wrong. ..."
"... And what he writes makes me think he doesnt know how banking works. I find it difficult to believe he is part of any conspiracy. But I may be wrong. ..."
"... My take is that the fractional reserve and intermediation models are just ways of obfuscating the way banking actually works and the credit creation model is the accurate one. I have some advice for anyone who is struggling with the concepts which is as follows: always merge all the banks in the banking system into one bank in your mind. Assuming multiple banks as the author above does is irrelevant to the analysis and only serves to add confusion. ..."
"... I enjoyed the article very much. And it does seem to me that money creation is made to seem very, very, complex. Now maybe Im just too stupid, but it always strikes me that when people simply describe something, they either really dont know, or they are trying to bamboozle you… ..."
www.nakedcapitalism.com

By Perry Mehrling, a professor of economics at Barnard College. Originally published at his website .

In his recent paper, "A Lost Century in Economics: Three Theories of banking and the conclusive evidence" , Richard Werner argues that the old "credit creation theory" of money is true (empirically "accurate"), while both the newer "fractional reserve theory" and the presently dominant "debt intermediation theory" are false. For him, this matters mainly because the false theories are guiding current bank regulation and development policy, leading down a blind alley.

But it matters also simply because we need correct understanding of how the economy actually works, "we" meaning not just economists but also the general public. "Today, the vast majority of the public is not aware that the money supply is created by banks, that banks do not lend money, and that each bank creates new money."

Why is the public ignorant of the truth? Much of Werner's paper is devoted to an account of how the correct theory was pushed out of the conversation, first in the 1930s by the fractional reserve theory, and then after WWII by the debt intermediation theory. One culprit was a shift toward deductive and away from inductive methods. Another culprit, he suggests, was the self-interested "information management" by central banks, i.e. direct suppression of truth in their own publications. And in this suppression, he further suggests, Keynesian academics were at the very least complicit: "attempts were made to obfuscate, as if authors were at times wilfully trying to confuse their audience and lead them away from the important insight that each individual bank creates new money when it extends credit."

In this history, Werner gives special attention to Keynes himself since Keynes seems to have held each of the three theories in succession throughout his life. Keynes' own intellectual trajectory thus foreshadows the subsequent evolution of monetary thought, and so probably is partly responsible for leading successive generations astray. Just so, one apparent legacy of Keynes is that the Bank of England is currently holding all three theories at the same time! "Since each theory implies very different approaches to banking policy, monetary policy and bank regulation, the Bank of England's credibility is at stake." BoE credibility is thus a third reason that all of this matters.

But is it really true, as Werner claims, that these three theories are "mutually exclusive"?

He is at considerable pains to show that they are mutually exclusive, by using a succession of stylized balance sheet examples. The credit creation theory says that banks make loans by creating deposits, essentially expanding their balance sheets on both sides by the same amount. (The borrower of course also expands his own balance sheet, the loan being his liability and the deposits being his asset. In my own "money view", I call this a swap of IOUs.) In this way, money (bank deposits) is created that was not there before.

By contrast, the debt intermediation view says that banks make loans by lending reserves that they are already holding, essentially swapping one asset for another, these reserves having previously been obtained by someone's deposit. The balance sheet expands when the deposit is made, not when the loan is made. Banks merely intermediate between savers and borrowers, and do not create money.

In between these two views, the fractional reserve view says that individual banks make loans by lending reserves, but that the banking system as a whole can and does create money, up to a multiple of reserve holdings. The banking system does create money, but only after and as a consequence of the central bank increasing reserves–this is the famous "money multiplier".

So the difference between the theories seems clear, and it also seems like that difference should be testable empirically simply by watching actual bank balance sheets and seeing what happens when a loan is made. Does the balance sheet expand or does it not? With the cooperation of an actual bank, Werner books a dummy loan and finds that the balance sheet of the bank does in fact expand. This he takes to be scientific proof that the credit creation theory is correct and the others are false.

Not so fast. Let's look a bit closer.

Let me begin by admitting my sympathy for Werner (as I have already hinted by mentioning my own "money view" as a version of the credit creation view). In fact, Werner's heroes–H.D. McLeod and Joseph Schumpeter–are my own heroes as well, and I suspect that graduate school exposure to these authors sent him off on his own intellectual journey just as it did me. Even more, thirty years after that initial exposure, I find Werner's (co-authored) money and banking textbook "Where Does Money Come From?" one of the best introductions to the subject. Last fall I assigned Chapters 2 and 4 in the first two weeks of "Economics of Money and Banking" which I teach at Barnard College, Columbia University. I'm sympathetic.

But I don't think these three theories are quite as mutually exclusive as he makes them out to be.

For me, the central analytical issue is the distinction between "payment" and "funding" .

Let us suppose, with Werner, that Citibank makes a mortgage loan to me of $200,000, simply by swapping IOUs. I then transfer my new asset (the new Citibank deposit) to you, and you transfer your house to me. As my payment clears, you have a new deposit in your own bank (let's say Chase, to make it interesting), Citibank has a "due to" at the clearinghouse, and Chase has a "due from". Again, to make it interesting, let's suppose that Citibank has no reserves, so it enters the interbank market to borrow some, from Chase. At the end of the day, what we see is that the Citibank balance sheet is still expanded, so is Chase's, and so is mine. Only your balance sheet stays the same size, since you have swapped one asset (your house) for another (money). That's the payments perspective.

What about the funding perspective? If we follow the balance sheets through, it is clear that your money holding is the ultimate source of funds for my borrowing. (You lend to Chase, which lends to Citi, which lends to me.) In this sense, we can think of both Chase and Citibank as intermediaries, channeling funds from one place in the economy to another. But, in this example, there is no saving and there is no investment. The sale of the house adds nothing to GDP, it is just a transfer of ownership. The expansion of the banking system has facilitated that transfer of ownership by creating a liability (the deposit) that you apparently prefer to your house, at the same time acquiring an equivalent asset of its own (the loan). Citibank collects the spread between the mortgage rate and the interbank rate; Chase collects the spread between the interbank rate and the deposit rate.

But all of that is only what happens right at the moment of payment. What happens afterwards depends on the further adjustment of all of these balance sheets. One way this could all work out is that Citibank packages my mortgage with others to create a mortgage backed security, and that you spend your Chase deposit to acquire a mortgage backed security (perhaps indirectly through a mutual fund that stands in the middle). In this scenario, the newly created money is newly destroyed, the balance sheets of both Citi and Chase contract back to their original size, and the end result is that you are funding my loan directly. But again, no saving and no investment, just a change in your asset allocation, away from money toward fixed income investment.

Obviously this final scenario is a limiting case on one side. The limiting case on the other side is that you (or whoever you transfer your money to) are willing to hold the newly created money balances as an asset, so you continue to fund my loan indirectly. Now when Citibank securitizes and sells, it is able to repay its interbank liability to Chase, and for simplicity let's say that Chase uses that payment to acquire a different money market asset. One way this could all work out is that a shadow bank–money market funding of capital market lending–acquires the security and uses it as collateral for wholesale money market borrowing from Chase. Again, no saving and no investment, but the new money stays in circulation and is not destroyed.

These are the limiting cases, and obviously anything in between is also possible, depending on the portfolio decisions of Citibank, Chase, and you. But in all the cases, the debt intermediation view of banking is perfectly consistent with the credit creation view of banking. One focuses on the ultimate funding, while the other focuses on the initial payment.

That said, I have to agree with Werner that the credit creation process is all too commonly left out of the story–most modern courses never even mention the payments system–and it is a real (and important) question how this came to be so. It is a further real (and important) question why the intellectual memory of how the process actually works was left to marginalized sections of academia–Werner mentions specifically the Austrians and post-Keynesians. I'm not so sure that it was a central bank plot, though I do think that the shift in academic fashion toward studying equilibrium of a system of simultaneous equations played a role in obscuring the kind of dynamic balance sheet interactions that are the essence of the story.

What I would emphasize however is not the negative but the positive. The fact of the matter is that today the credit creation view is out of the shadows, and no longer the exclusive property of the marginalized . In evidence of this, I would direct your attention to the two Bank of England papers that Werner himself cites: here and here . But I would add to that also the most recent report coming out of the Group of 30 "Fundamentals of Central Banking, Lessons from the Crisis" . On page 3 you will find the following:

"In a barter economy, there can rarely be investment without prior saving. However, in a world where a private bank's liabilities are widely accepted as a medium of exchange, banks can and do create both credit and money. They do this by making loans, or purchasing some other asset, and simply writing up both sides of their balance sheet."

That's the truth that Werner wants central banks to admit, and now it appears that they have admitted it. The next question is what difference it makes, and that's a question for next time. Already it should be clear that progress toward answering that question will require us to be more careful about issues of payment versus funding.

P.S. BTW, the title of this post [at Merhling's site, which is "Great and mighty things which thou knowest not" [?]] is taken from Jeremiah 33:3 which Werner references in a footnote to his title: "should grains of wisdom be found in this article, the author wishes to attribute them to the source of all wisdom." Werner is apparently listening to powers higher than just McLeod and Schumpeter!

tricky rick , January 29, 2016 at 10:11 am

Chris Martenson and other "tin foil" folks have been laying this out in well documented studies for over a decade.

welcome too late to the party.

John Merryman , January 29, 2016 at 10:59 am

I think another aspect that should be considered is the preservation of surplus money through government debt.

For example, Volcker is credited with curing inflation through higher interest rates, but that slowed the economy as well and so reduced the need for money. It wasn't until Reagan had increased the deficit to 200 billion in 82 that inflation seemed to come under control enough that they could lower rates.

Now one way to create higher rates is for the Fed to sell debt it bought to create the money in the first place. So what is the difference between the Fed selling debt it is holding and the Treasury issuing fresh debt, other than the Fed destroys its money and the Treasury spends it on public works, thus Keynsian pump priming.

So who buys this debt, but those wealthy enough to have surplus money. Which suggests that if there is a surplus of money in the system, causing inflation, the easiest place to remove it is from those with a surplus of money.

Now money really does function as an enormous, glorified voucher system and what is more destructive of such a system, than enormous amounts of surplus vouchers?

So given that those with lots of such excess vouchers consequently have leverage over the rest of the system, what way to better preserve this wealth, than to have the public borrow it back and pay interest, even if much of what it gets spent on doesn't produce sufficient income to pay that interest, if not actually lost?

Eventually though even the public can't afford to keep this up, so what is the alternative?

Now most people save for predictable reasons, from raising children, housing, healthcare, to retirement and funerals. So what if the government, i.e., the public, were to threaten to tax excess money back out of the system, rather than just borrow it? Necessarily people would quickly find means to invest into these future needs directly, rather than trying to save up notational value. The problem is that we don't know exactly what we will need for what, which would mean we would have to invest into community and public projects, rather than save for our own specific needs.

While this might seem onerous, consider that we currently live in a highly atomized society, that is largely mediated by that failing financial mechanism. So if we had to start functioning as a more holistic group, with more organic interactions and public spaces and commons, people might have to come out of their shells a little more and deal with lots of other social and personal issues, which might not be a bad thing.

Basically we treat money as both medium of exchange and store of value, but these are different functions, as a medium is dynamic and a store is static. For instance, in the body, blood is the medium and fat is the store. Try storing fat in the arteries and you get clogged arteries, poor circulation and high blood pressure to compensate, which is analogous to our financial issues, with a clogged banking system, poor circulation to the rest of the economy and quantitive easing to compensate.

While the brain might need more blood than the feet, it does neither any good for the feet to rot and die from lack of circulation, nor does it do the brain any good to have excess blood. Similarly we need a stronger social structure and a leaner, more efficient economic medium, in which the excess is stored as the muscle of a stronger society and a healthier environment, rather than just treating them as stores of wealth to be monetized and siphoned away.

Helmholtz Watson , January 29, 2016 at 11:06 am

Yes, the money creation process has been a big lie for a long time. In any case the Bank of England came clean a couple of years ago and admitted that standard story of money creation was false. They even acknowledge that it is not properly explained in most money and banking textbooks, which is a staggering admission.

Paul Krugman wrote a column a couple of months ago where he claimed that banks take in savings from depositors and lend them out to borrowers which tells you either: 1) he doesn't' know how banking works or 2) he is part of the conspiracy to keep the public in the dark.

The truth right from the mouth of the worlds's oldest central bank. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf

fresno dan , January 29, 2016 at 11:20 am

Yeah, I saw that. It is amazing that a supposedly foremost Princeton Nobel winning economist apparently doesn't understand where money comes from…

jsn , January 29, 2016 at 11:46 am

In the mainstream world money is just a "veil" that obscures your view of how the divine markets work. They deliberately leave it out because it just confuses things…

No wonder no one in that world saw the GFC coming, they still all claim whocuddaknowed?

larry , January 29, 2016 at 1:37 pm

There is evidence that Krugman seems to have great difficulty admitting he was wrong. He even contends that using IS-LM is a good too for introducing students to the macroeconomy, even when they must unlearn it when they delve deeper in to the workings of the macroeconomy, and this is after Hicks himself rejected it as being an inaccurate depiction of the macroeconomy later in his life. I can't say what Krugman is thinking, but then I don't have to. I can go just by what he writes. And what he writes makes me think he doesn't know how banking works. I find it difficult to believe he is part of any conspiracy. But I may be wrong.

helmholtz watson , January 29, 2016 at 2:51 pm

Yes it's hard to believe that Krugman might not know how money/banking works but he is a very ideological guy. I happen to be sympathetic to many of his ideological views but any one who is intensely ideological is rarely a critical and independent minded thinker. Ideology is way of simplifying complex things and making your self more comfortable, and doesn't lead to knowledge. I am no expert on money and banking but I have read ten books on the subject over the last four years and numerous papers. I am pretty sure I understand it now. I think this guy Werner is right. It seems probable that there was an orchestrated campaign to obfuscate how banking and money creation work and one can imagine why that might have happened. Banking is quite literally a pyramid scheme under even the most conservative circumstances! Such a system can work and makes sense if it is prudently managed, regulated and limited in scope.

My take is that the fractional reserve and intermediation models are just ways of obfuscating the way banking actually works and the credit creation model is the accurate one. I have some advice for anyone who is struggling with the concepts which is as follows: always merge all the banks in the banking system into one bank in your mind. Assuming multiple banks as the author above does is irrelevant to the analysis and only serves to add confusion.

Christer Kamb , January 29, 2016 at 7:10 pm

Sorry Mr Watson but the swedish Riksbank is the world´s oldest central bank

fresno dan , January 29, 2016 at 11:18 am

I enjoyed the article very much. And it does seem to me that money creation is made to seem very, very, complex. Now maybe I'm just too stupid, but it always strikes me that when people simply describe something, they either really don't know, or they are trying to bamboozle you…

I think the article would have been more enlightening though if the example had been for a house that was TO BE BUILT.
Using that as an example, it seems to me that money is LOANED into existence – the person who wants the home loan has a good reputation, but the whole point of the loan is that they don't have nearly enough money to buy the house.

The carpenters and other workers don't get paid until they have done work (they loan their work to their employer), i.e., produced a house (or some portion of it). The money in the loan becomes real because a house that didn't exist now exists. There is more stuff in the world, and there is more money. And I think it explains something important – not any loan is useful. A house worth 100K that is sold for 1000K but than is foreclosed upon – somebody has to take a real loss – either the person who got the home loan, and to the extent that they can't pay the loan back, a builder or the bank takes the loss (if the foreclosed value is less than the original loan value)
So, is that correct?

Again, thanks for the article and I am looking forward to the next one!

paulmeli , January 29, 2016 at 11:23 am

Pick any year post WWII (because the data is readily accessible).

Compare the levels of federal spending and credit expansion.

Federal spending created more money every year except for the years 1998 thru 2007, where it was about even, and for 2006 and 2007 credit expansion was some 50% higher.

Then we got the mother of all credit crises.

Over that post WWII period federal spending created ~$78T while credit created ~$46T.

The common refrain is that federal taxes subtract from federal spending so it ends up being less.

Except in what universe do income taxes accrue only against income resulting from federal spending? It's nonsense and should be derided as such. It's an accounting convenience that does not reflect what is actually happening.

It may make sense for National Accounting (and to keep banksters in the drivers seat) but it makes zero sense in a rational analysis of a real-world system. That is the only way banks could be touted as the source of most of our money.

Despite an otherwise sound argument this article perpetuates the myth.

The banksters apparently have a hold on everyone, including the so-called 'good guys'.

Some justification based on the level of bank reserves or some other convoluted argument in 5,4,3,2,1 …

financial matters , January 29, 2016 at 11:31 am

Very interesting and I'm looking forward to your next installment.

I'm especially interested in the transfer of reserves from Chase to Citi and as you further point out 'Chase possibly using its reserves to acquire a different money market asset. One way this could all work out is that a shadow bank–money market funding of capital market lending–acquires the security and uses it as collateral for wholesale money market borrowing from Chase.'

This seems to be a transmission mechanism for asset appreciation as Eric Tymoigne is getting into is his excellent series:

"post 7 will start the private-bank posts) on monetary policy and the QE -asset price channel will be explained. But here is a short answer:
No bank's don't use cash to buy assets. If they deal with non-bank agents they just credit bank accounts, if banks deal with a fed account holder they debit their reserve balances to make payments.

The link works through interest rate, arbitrage, search for yield, and the fact that QE reduces the quantity of securities available in the market."

"the issue is how they would transfer the funds to make the purchase? They could buy securities if they find a fed account holder willing to sell them securities: Treasury is one, GSE is another one. Non-financial institutions no."

craazyman , January 29, 2016 at 11:31 am

All they do is talk about how the parts of the machine move - which is itself an amazing problem of conceptual collinearity - but not the phenomenon of the machine itself.

More and more you just say "Why not go to Youtube and check out a Rhianna video, rather than read another one of these essays."

Eventually maybe they'll get it. But when they study economics their whole adult life - and nothing else - it makes it hard. It's not like they're dumb or that they lack mental ability. In fact, they're all intelligent individuals who are quite capable in most areas of thinking. It's just that the conceptual language they need to use in order to perceive the phenomenon itself is a language they do not know. And so they look at reality and they try to make sense of it using the language they do know, and because words themselves and the ideas in the words catalyze perception, their limited language is not fully adequate, and they don't see or know that. What can you do? Everybody has to see it for themselves.

At any rate, you'd think by now it wouldn't be so hard. But most people aren't interested in this sort of thing so progress is really slow. Most people just go right to Youtube.

susan the other , January 29, 2016 at 12:28 pm

Adenosine triphosphate. The example several years ago in the comments, by a biologist, that it would be an extinction event for a colony of amoeba if a few of them decided to short amoeba futures and just hoard all the adenosine triphosphate – the one chemical every amoeba must have to transfer energy. Wish it had been an analogy to symbolic ADP which had usurped the real stuff and was being hoarded to make sure it maintained its value.

susan the other , January 29, 2016 at 12:32 pm

ATP

craazyman , January 29, 2016 at 1:10 pm

very nice! you have always impressed me with your thoughtful and penetrating intelligence.

(even though you go off the wacko, foo-foo, hug-the-trees cliff sometimes.)

Clive , January 29, 2016 at 2:16 pm

You assured me susan was a bona ride adjunct professor of theosophical studies at the University of Magonia. I want, nay, I demand my tuition fee, which apparently I had to pay in advance because otherwise 42 other Chinese applicants would be in line for my place, back.

craazyman , January 29, 2016 at 2:45 pm

she's a full profeser of creative analysis. she hugs trees as an adjunct profeser of foo foo philosophy

craazyboy , January 29, 2016 at 4:16 pm

Dunno why they have all these theories. It's simple. The Fed lowers interest rates, the mark to market value of bank assets go up, which greatly improves cap ratios, then banks don't need liabilities anymore. They just can make endogenous money and give it out to borrowers' banks.(it's all done electronically and fast so no one notices) All the Big Guy econ types know that.

All the rest of it is just details banks go thru just for show. Plus they can securitize and sell any assets they think may drop in value. They're smart people.

Now, the other thing all the Big Guy econ dudes always say is once us little folk figure it out, something wonderful is supposed to happen. Maybe I missed it, but what thing is that???

Maude , January 29, 2016 at 11:33 am

You forgot one piece…

Let us suppose, with Werner, that Citibank makes a mortgage loan to me of $200,000, simply by swapping IOUs. I then transfer my new asset (the new Citibank deposit) to you, and you transfer your house to me. As my payment clears, you have a new deposit in your own bank (let's say Chase, to make it interesting), Citibank has a "due to" at the clearinghouse, and Chase has a "due from". Again, to make it interesting, let's suppose that Citibank has no reserves, so it enters the interbank market to borrow some, from Chase. At the end of the day, what we see is that the Citibank balance sheet is still expanded, so is Chase's, and so is mine. Only your balance sheet stays the same size, since you have swapped one asset (your house) for another (money). That's the payments perspective.

Is the house owned free and clear? If not, the exchange eliminates that original liability/asset on someone else's balance sheet so everything is now at a net zero as far as new money circulating in the economy. Banks did not create anything new. They only exchanged one Asset/Liability for another Asset/Liability. Even if the house was paid off 20 years ago, there is no new money created from this transaction. The only way "new money" is created would be through interest paid on Treasuries, and direct deficit spending by federal government.

Mustsign topost , January 29, 2016 at 12:08 pm

debt intermediation theory is this: consumer loans -> salary -> pension funds
kleptocracy is this: privatization -> state spending -> profit

Anon , January 29, 2016 at 12:09 pm

As the commenters on the post at Prof. Mehrling's site have observed, his argument is logically flawed. He concludes: "But in all the cases, the debt intermediation view of banking is perfectly consistent with the credit creation view of banking."

The intermediation view of banking "says that banks make loans by lending reserves that they are already holding," as he explains at the beginning of his piece. In his example, the deposit that is created by the banking system funds the loan. Of course, in both case intermediation takes place but the nature of the intermediation is not comparable.

In the first case, banks have no special status in the economy. After all any of us who has a balance of $100 can lend out that balance of $100. In the second case, the only reason the bank can make the loan is because of a social norm in which the public trusts the banking system and is willing to keep its money in banks. This fact has always been a fundamental component of the credit creation theory of money - it is founded on the public's trust in the banking system. This trust allows banks to expand the money supply - at the potential expense of the public.

While I have great respect for Prof. Mehrling, it is far from clear that he has a good understanding of the credit creation view of money.

diptherio , January 29, 2016 at 12:29 pm

When I looked into the data about 5 years ago, it appeared that only a few large banks were actually operating on a credit-creation basis. Most banks (meaning your local, independent banks and credit unions) appeared to be operating on an intermediation model. Deposits are always the cheapest way to fund a loan, and for small banks, that looks like pretty much the only way they do it – iirc, loans were 60-80% of deposits in most banks. However, at JPM, BofA, etc, their loans were well over 100% of their deposits…like waaaay over. So it looked to me like just a few big players were driving endogenous money creation, while most banks actually were doing, essentially, what fractional-reserve theory says they do.

That's my understanding, but I don't claim to be an expert.

Anon , January 29, 2016 at 12:36 pm

diptherio:

Banks no longer keep their loans on balance sheet, so a simple static analysis of their balance sheet doesn't tell us much about how much credit creation they are doing. To study the degree to which banks create money you have to look at the role they play in the shadow banking system as well.

Skippy , January 29, 2016 at 6:28 pm

Too some degree… my concerns about the shadow sector vastly out weigh the traditional sector e.g. has the traditional sector become [increasingly] just a front house op to generate velocity for the shadow sector, and the latter just needs a – store of – when the economy gets a black eye.

Skippy , January 29, 2016 at 7:17 pm

Therein lies the rub e.g. some fixate on one component of a veritable galaxy of operational scope, so at this juncture on can surmise that new universes of credit are created and inserted into the multiverse to survive on their own [inhabitants luck of the draw]. Maybe theoretical physics would be a better methodology of describing credit activity's at this juncture than thermodynamics, ideology, or socio-economic-political optics…

JeffC , January 29, 2016 at 9:29 pm

There's a confusion here. Suppose a bank with reserves R and corresponding deposits X, in addition to other balance-sheet items, has

R X.

at the top of its balance sheet. It makes loan L, which creates new deposit D to obtain balance sheet

L D *
R X.

The borrower/deposit-holder transfers her deposit to another bank, so the original bank's balance sheet drops down to

L X,

while the new bank gains this on its balance sheet:

R D.

So the sequence is (1) create new deposit D and (2) transfer the deposit to the new bank. This is the money-creation model in action. It is correct.

When we imagine that reserves are being loaned instead, we are actually skipping the balance sheet marked * above. Comparing the balance sheet before and after the skipped one, we come to believe that reserves have been turned into a loan. This is incorrect. The newly created deposit is simply in a different bank. To see what is really going on, we have to consider the loan and transfer separately.

JTMcPhee , January 29, 2016 at 4:57 pm

Can anyone tell me where that $100 came from? Or the $200,000 to buy that archetypical house? We got lots of "blind philosophers feeling their part of the elephant and pronouncing its essence" but where does "wealth" originate, as opposed to money and "assets?"

cnchal , January 29, 2016 at 10:50 pm

. . . but where does "wealth" originate

(MMT – Material Meets Tool X sales) – expenses = profit or loss. If it's profit, that is wealth. If it's loss that is hell.

nothing but the truth , January 29, 2016 at 7:59 pm

"In the first case, banks have no special status in the economy. After all any of us who has a balance of $100 can lend out that balance of $100"

yes you can lend it out, but the bank is 1) at the top of collectors line 2) has backing from the FDIC. When you loan 100$ to someone, you dont have that money anymore. When you lend 100$ to the bank, you still have that money, and about 10 other people have it as well.

JTMcPhee , January 29, 2016 at 8:33 pm

I'm sure it must be obvious to brighter and more subtle folks than me, but where does that $100 that's referenced here come from?

I have an antique wood-bodied block plane (the woodworking kind) made by my great-grandfather ( except for the perfect cast iron blade and two nails). He used tools he made or bought to carve the body and chisel out the throat and make the wedge. I was offered $100 for it recently. Where does the wealth or value that my ancestor's plane, now mine by inheritance and survival, come from? Or all the other $100s that make up " the economy" that the MorgulBankers are conjuring derivatives out of?

cnchal , January 29, 2016 at 11:32 pm

. . .I was offered $100 for it recently. Where does the wealth or value that my ancestor's plane, now mine by inheritance and survival, come from?

From your ancestor's labor in creating the plane and an ongoing demand from people interested in acquiring the plane.

Where the $100 offer comes from is the perceived value of the plane compared to other planes on offer, such as for example the Chinese made crap in Home Depot.

Since it sounds like you didn't sell it for $100, you value it at a higher price. Wondrous market eh.

Helmholtz Watson , January 29, 2016 at 1:46 pm

What is truly amazing about this is that in year 2016 there is still massive confusion and ambiguity about how money and banking work. How can that be? Bizarre!

MaroonBulldog , January 29, 2016 at 6:25 pm

Q. How can that be?

A. Easily: "the false theories are guiding current bank regulation and development policy, leading down a blind alley." If correct understanding would lead to a correct regulation, then those whose interests would no be served by correct regulation will obfuscate correct understanding.

Blurtman , January 29, 2016 at 3:21 pm

Banks lend what they do not have.

MED , January 29, 2016 at 3:25 pm

For the TBTF banks, change the famous "money multiplier". up 10% per Billion

kevinearick , January 29, 2016 at 4:08 pm

Psychograpic Marketing, LSD & Mind Control

Baby yoga for kids living in the forest, who never go outside alone; the highest real mortality rate in the US; and the prototype for Family Law feeding Obamacare in the big city – does it get any dumber than that?

The psychologists are just smart enough to get the majority killed. The markets are an exercise in control, a game, and nothing more, until Little Johnny jumps off Science Building and shorts the insanity all together. Did you see that last impulse, transferring wealth to the Soros clan, now demanding another bailout?

The assumption of emotion-based decisions, lest one be a robot, is ludicrous, but that is the basis of empire marketing. The majority short-circuits itself, with the false assumptions presented by empire media broad band, the frequency it chooses to occupy, to mirror itself, and obsessive-compulsive behavior begets itself. The brain stem is a geared Archimedes Screw.

Because the body is grounded to earth, the dc side of the brain is self-obsessed, and LSD offsets the signal into the noise of the clutch, is no reason to hand your life over to a psychologist printing money. Because the predicitive subconscious exists in a feedback loop with adaptation doesn't mean that everyone is sick, stuck on an empire frequency, and mentally ill if they don't seek diagnosis. Money is not reality, except for those who choose it.

Wall Street sells mortgages with increasing duration, Madison Avenue produces crap for compliance at increasing cost, and the majority indentures future generations with bonds, until they can't. Global finance simply liquidates natural resources and moves, in planetary rotation. Relative to unincorporated farming, the land is largely fallow, but the participants have TV, cardboard and gadgets, dependent upon empire for a battery.

Net, populations vacillate between denial and depression, with growing impulses of anger, in a market for psychologists who see others as a reflection of themselves. Married people raising independent children cannot afford to be quite so stupid. And without such children, the economy can only implode, reflecting the psychologists' own self-obsession.

Do you remember that story about the natives not seeing Christopher's ship, until the shaman pointed it out, when the natives were slaughtered by war, disease and poverty?

Females can breed on equal rights for a thousand years, with males providing the technology, but they will just end up a thousand years behind the curve. Women are bred to think in linear time, and men to think in frequency, because that is what children need. One is the counterweight and the other is the cab.

The majority, focused on self, rides the counterweight to floors on one side, all dead ends, and is jealous of children exiting on the other side. The choice at the crossroad is always the same, investment or consumption. The majority is not experiencing falling living standards and increasing income inequality because some banker provided the money, an excuse, for multicultural unicorn dreaming.

Retired people generally prefer a Fred and Wilma economy, city kids generally prefer a rat race, and once separated for the purpose, the police are generally dispatched to slice and dice families into sausage to feed the former, by authorities always pleading ignorance, majority vote. Once you see those cops, promoting gang awareness, it's time to go. At empire cycle begin, you have plenty of time; now you have none.

When I began writing this, I had no idea where the focus would be, but I do have a pattern database and a linear time translator, such as it is. My wife can tell you the weather 25 years, 3 months and 10 days ago. Choose a wife that enjoys living in the moment, and a husband that enjoys an independent frequency, compliments capable of trust in an untrustworthy world.

My mind is a steel trap, my wife's is Disneyland, and we live in the feminist capital of the world, as you might suspect with an ac mind. Your perspective is your own, if you choose to have one, and we all go through phases, climbing and descending the ladder of consciousness. I am simply sharing, after decades of listening and saying not a damn word, in the empire, on the eve of WWIII.

From the perspective of legacy, which has no clue what is in those libraries, the Internet was designed to extend linear thinking, to nowhere. From the perspective of labor, the Internet was designed to demonstrate the fallacy of limiting yourself to linear thinking. Contrary to popular mythology, choice is not about the color of your tennis shoes made in China.

If it's not anonymous cash, it cannot store value, because independent children are reared beyond empire's grasp, the physical manifestation of intellectual self-obsession, which Sweden is now learning, way to late, a slave to Germany, and Austria in particular. Knowing what needs to be done and doing it are two different things. The psychologists in New Hampshire produce drug addiction, their solution is drug rehab, and Iowa is supposed to be nuts.

You didn't think Keynes sprang from nothing did you?

Skippy , January 29, 2016 at 6:30 pm

From opti to me and from me to you….

http://nautil.us/issue/7/waste/blissed_out-fish-on-prozac

ke , January 29, 2016 at 8:52 pm

Thanks. The wife likes to keep track of water. She's like a human testing machine. Best water I had was up at bay of fungi, big moose. That document on Ford's car made of hemp and plastic was pretty cool, before he was told he would be making cars out of steel, finance.

Always thought I would end up in Australia, but like the doctor thing, the critters have to destroy everything they touch.

Thank again

nothing but the truth , January 29, 2016 at 8:05 pm

keynes is describing a dollar based on gold standard.

your problem is that you refuse to see meaning in the real. you see meaning only in money. and money, now, is nothing. it is a fiction.

all these articles are symptoms of your cognitive dissonance. all your meaning is eventually money and money is eventually nothing.

and from this seems to come the idea that since money is nothing, reality can be created from nothing.

not so easy.

animalogic , January 29, 2016 at 9:35 pm

Fiat money is not a "nothing". But it can certainly become a nothing…if everyone loses belief it it.

Skippy , January 29, 2016 at 10:10 pm

How can one lose belief in each other – ?????

Darthbobber , January 30, 2016 at 12:15 am

"Contradictions, of which money is merely the palpable manifestation, are then to
be transcended by means of all kinds of artificial monetary
manipulations. It is no less clear that many revolutionary
operations with money can be carried out, in so far as an attack on
it appears only to rectify it while leaving everything else
unchanged. We then beat the sack on the donkey's back, while
aiming at the donkey. But so long as the donkey does not feel the
blows, one actually beats only the sack, not the donkey;
contrariwise, if he does feel the blows, we are beating him and not
the sack."

At the end of the day, what ultimately needs to be impacted is not the pieces of paper.
All we can ever do with those is hand people claims against future production.

And when the theory of "managing" an economy stops at the control of aggregate numbers as its only allowable tool to influence the process, it can never accomplish the objective of avoiding major crises.

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[Jan 26, 2016] Saving the Banks and Fabulously Enriching a Few On the Back of the Real Economy

Notable quotes:
"... It has become a machine for transferring income, wealth, ownership, and power to the very top. This is not the new normal. This is financial corruption and the erosion of systemic integrity. Are there any markets that have not been shown to have been systematically manipulated, for years? This is just institutionalized looting. ..."
Jesse's Café Américain
"Give a small number of people the power to enrich themselves beyond everyone's wildest dreams, a philosophical rationale to explain all the damage they're causing, and they will not stop until they've run the world economy off a cliff."

Philipp Meyer

"Wall Street is not being made a scapegoat for this crisis: they really did this."

Michael Lewis

"My daughter asked me when she came home from school, "What's the financial crisis?" and I said, it's something that happens every five to seven years."

Jamie Dimon

"The greatest tragedy would be to accept the refrain that no one could have seen this coming, and thus nothing could have been done. If we accept this notion, it will happen again."

Financial Crisis Inquiry Commission (2009–2011)

The US has been in a cycle of bubbles, busts, and crashes since at least 1995, and more likely since Alan Greenspan became the Chairman of the Federal Reserve in August, 1987.

The cycle is the same, only the depth and duration seems to change in a continuing 'wash and rinse' of the public money and the real economy.

It has become a machine for transferring income, wealth, ownership, and power to the very top. This is not 'the new normal.' This is financial corruption and the erosion of systemic integrity. Are there any markets that have not been shown to have been systematically manipulated, for years? This is just institutionalized looting.

[Jan 26, 2016] Public Investment: has George Started listening to Economists?

Notable quotes:
"... The case for additional public investment is as strong in the UK (and Germany ) as it is in the US. Yet since 2010 it appeared the government thought otherwise. ..."
"... However since the election George Osborne seems to have had a change of heart. ... ..."
economistsview.typepad.com

Simon Wren-Lewis:

Public investment: has George started listening to economists?: I have in the past wondered just how large the majority among academic economists would be for additional public investment right now.

The economic case for investing when the cost of borrowing is so cheap (particularly when the government can issue 30 year fixed interest debt) is overwhelming. I had guessed the majority would be pretty large just by personal observation. Economists who are not known for their anti-austerity views, like Ken Rogoff, tend to support additional public investment.

Thanks to a piece by Mark Thoma I now have some evidence. His article is actually about ideological bias in economics, and is well worth reading on that account, but it uses results from the ChicagoBooth survey of leading US economists. I have used this survey's results on the impact of fiscal policy before, but they have asked a similar question about public investment. It is
"Because the US has underspent on new projects, maintenance, or both, the federal government has an opportunity to increase average incomes by spending more on roads, railways, bridges and airports."
Not one of the nearly 50 economists surveyed disagreed with this statement. What was interesting was that the economists were under no illusions that the political process in the US would be such that some bad projects would be undertaken as a result (see the follow-up question). Despite this, they still thought increasing investment would raise incomes.
The case for additional public investment is as strong in the UK (and Germany) as it is in the US. Yet since 2010 it appeared the government thought otherwise. ...
However since the election George Osborne seems to have had a change of heart. ...

[Jan 23, 2016] Watch out for this $1 trillion stock bubble

Notable quotes:
"... A structural problem may arise when the liquidity demanded by the ETF exceeds the liquidity availability of some of the underlying holdings ..."
"... Basically, if an investor wants to sell an index fund as the market declines, the managers of the fund might have trouble selling some of the stocks in the fund. ..."
"... But there are some steps investors could take to manage the risks posed by an index fund-dominated market. In addition to investing some of their stock portfolios in actively managed funds, McCarthy suggests investors take a hard look at how diversified they are. ..."
"... First, he said, an investor could make sure he or she isnt double-exposed to the same stocks. ..."
"... Sometimes its better to be vaguely right than exactly wrong ..."
www.cnbc.com

As volatility in the stock market grows, a handful of experts are raising an alarm about the rise of index ETFs and mutual funds, which has never accounted for this much of the market before.

They warn that the unprecedented amount of index ETFs trading in the market - index ETFs accounted for nearly 30 percent of the trading in the U.S. equities market last summer - could magnify, or even cause, flash crashes.

In turn, that may put individual investors, who are increasingly invested in index funds, more at risk. And many may not realize how exposed they are to the risks of a relatively small group of stocks held in the major indexes, said experts.

Tim McCarthy, a former president of San Francisco-based Charles Schwab and Japan's Nikko Asset Management, has been a longtime proponent of index investing. But he now advises that investors diversify their investment styles as well as their asset classes.

He suggested investors move 25 percent to 50 percent of their equity portfolios into actively managed absolute return funds, preferably those with a 10-year track record and a relatively small amount of assets of between $1 billion to $2 billion. (Research has shown over the years that active managers stand their best chance of success before their assets under management grows too high.)

As always, he said, investors should look for low fees.

A stock bubble in index funds

He said he has grown increasingly uneasy about the risks based on the hypergrowth of index funds, and the price difference between stocks outside and inside index funds.

From 2007 through 2014, index domestic equity mutual funds and ETFs received $1 trillion in net new cash and reinvested dividends, according to the Washington, D.C.-based Investment Company Institute. In contrast, actively managed domestic equity mutual funds experienced a net outflow of $659 billion, including reinvested dividends, from 2007 to 2014.

Meanwhile, the price of the underlying equities in index funds is rising, though no one is sure exactly why. Research by S&P Capital IQ, as of Dec. 31, found stocks that were in the Russell 2000 were trading at a 50 percent premium to stocks that were not, up from 12 percent in 2006. The statistics are based on median price-to-book ratio.

That kind of price difference is seen by some as a kind of canary in the coal mine, indicating that there is a bubble in the stocks of companies held in index funds - and that their prices could come down further and faster than other stocks in a downturn. In turn, that could put pressure on the share prices of the index mutual funds and ETFs themselves.

"It's complicated, but it could be a very big problem," said David Pope, managing director of quantamental research at S&P Capital IQ. He and colleague Frank Zhao studied the liquidity in the market for the S&P 500 last summer and identified the 10 stocks that had the biggest difference in liquidity at that time, compared with the index. They included ExxonMobil, Berkshire Hathaway, Johnson & Johnson, Microsoft, General Electric, Wells Fargo, Procter & Gamble, JPMorgan Chase, Pfizer and PepsiCo.

"A structural problem may arise when the liquidity demanded by the ETF exceeds the liquidity availability of some of the underlying holdings," they wrote.

Basically, if an investor wants to sell an index fund as the market declines, the managers of the fund might have trouble selling some of the stocks in the fund. An active manager could choose to sell any stock in her fund and thus potentially navigate a downturn better. But an index fund manager has to sell exactly the shares held in the index in the same proportion as demanded by the index. If the fund manager doesn't find a buyer for, say, shares of ExxonMobil, the price of ExxonMobil will fall until a buyer is found.

Assessing the risks

While market theorists have always recognized this as a potential problem for index investing, no one has been sure exactly how it would play out or when problems might arise. As long as there are enough buyers and sellers actively setting prices and trading, index funds and stocks should pose no extra risk. It's just that no one is sure exactly how many is enough.

Indeed, not everyone thinks McCarthy is right, and others point to different risks as bigger causes for concern, including the unknown impact of the way that high-frequency traders place orders.

"So we have two new factors when it comes to a potential market situation," said John Rekenthaler, vice president of research for Chicago-based Morningstar. "There are always new factors. Most of the time, new factors don't play out according to expectations."

He pointed out that two decades ago, people worried about what the impact of 401(k)s would be in the market and whether non-professional investors would be apt to sell more quickly in a downturn. The opposite turned out to be the case.

Even if the risk posed by index investing is rising, the growth in index funds doesn't necessarily pose a huge system risk, pointed out Sean Collins, senior director of industry and financial analysis for the Washington, D.C.-based Investment Company Institute. "The share of assets going into index funds is rising. Does that necessarily cause markets to be dysfunctional? The answer is no," he said.

He pointed out how much more diversity there is now in index investing. Much of the money flowing into index funds has been going into markets in which there hasn't been much indexing before, including emerging markets equities and bond markets.

McCarthy said investors would be wise to look at their portfolios with the emerging risk of index funds in mind. There's not much an individual investor can do to guard against the risks posed by high-frequency trading, short of bowing out of the market entirely.

What investors should do

But there are some steps investors could take to manage the risks posed by an index fund-dominated market. In addition to investing some of their stock portfolios in actively managed funds, McCarthy suggests investors take a hard look at how diversified they are.

First, he said, an investor could make sure he or she isn't double-exposed to the same stocks. He cited the case of a friend of his, a doctor, who had invested in blue-chip stocks, some mutual funds and in an S&P 500 fund that turned out to hold - guess what - many of the same blue chips and tech stocks. In the downturn in 2000–2001, he lost 50 percent of his portfolio.

Every market is different, McCarthy said. But in part because of the flow of money into index funds, the U.S. equities market has become more dominated by a handful of big technology stocks. That's something that index fund investors, like his doctor friend, may not easily recognize now.

As someone who has managed the back end of trading systems, McCarthy said he is increasingly uneasy about the level of index investing and has begun to give speeches about the potential dangers of a market in which a growing number of managers are hamstrung by the requirement that they match their indexes.

But he knows that he's at the leading edge of people talking about it -- and that many think he is warning too hard and too fast. "This is unfamiliar territory for me," he acknowledged. "But index investing has so much power, and it's derivative-priced.

"Sometimes it's better to be vaguely right than exactly wrong," he said.

- By Elizabeth MacBride, special to CNBC.com

Read More › Most absurd ETF trade of all - paying 100 basis pts for it

[Jan 18, 2016] Texas Oil and Gas Production Declining - Peak Oil BarrelPeak Oil Barrel

peakoilbarrel.com

Watcher , 01/17/2016 at 6:58 pm

Well, not really reverse QE, or . . . maybe.

If you're an oil funded Sovereign Wealth Fund and oil is flowing money into you, you gotta put that money to work somewhere and that's likely stock markets. Up bias on them. If oil revs stop being big and govt spending exceeds govt revenue then the SWF will be tapped (along with borrowing to fund that deficit). Neither would extract money from the system (the system being uber macro) so it's not reverse QE.

But . . . it is a down bias on equities. Now THAT can be reverse QE via HFT momentum. Money disappears when equity prices fall.

likbez , 01/17/2016 at 7:33 pm

"Neither would extract money from the system (the system being uber macro) so it's not reverse QE."

But stock market drop is in itself a kind of reverse QE.

" Now THAT can be reverse QE via HFT momentum. Money disappears when equity prices fall."

[Jan 18, 2016] When successful investors warn of a global market crash, we should all be nervous

www.newstatesman.com

newstatesman.com

When successful investors warn of a global market crash, we should all be nervous

Profits are so thin that the slightest pothole could cause a crash.
By
Felix Martin

Print HTML

This year's January sales seem to have extended to the world's stock markets. A week in to 2016, you could buy the FTSE for 6 per cent less than on New Year's Eve. It is the worst start to the year in at least two decades.

What is behind these New Year blues? As ever, when it comes to the markets, there is an embarrassment of plausible culprits and a cacophony of self-styled experts willing to tell you what they are. This time, however, you can also turn to someone whose hard-earned credibility is not in doubt.

Martin Taylor is probably the best-known investor you have never heard of. A legend among the trading cognoscenti, he has returned over 20 per cent a year to his investors for more than two decades. On 4 January, he announced that he was closing his Nevsky Fund, arguing that we are heading for a combination of catastrophes that even the most skilful investor will be unable to avoid. His assessment makes fascinating reading. The root of the challenge that Taylor sees facing the world economy is simple. In December 2015, the US Federal Reserve raised its policy rate from near zero for the first time since December 2008. It is likely to be the start of a cycle. The direct effect is that the cost of borrowing dollars is rising. The indirect effect is that the dollar is strengthening on the foreign exchanges. After seven years in the bargain basement, the greenback is becoming expensive again.

Interest-rate hikes are always a shock to the system but they have happened numerous times before over the past few decades: so why should they be such a problem now? The answer is that, this time, the situation is different in three crucial respects. First, interest rates have been stuck at unusually low levels for an unusually long period of time. (In Britain, the Bank of England's rate has been 0.5 per cent since 2009.) Borrowers throughout the economy have got used to easy money; a generation of homeowners and investors has never seen anything else. After more than seven years of cheap debt, the shock of the old will be all the worse.

Second, a terrible irony is at work in the corporate sector. Companies have responded to the lacklustre recovery from the global financial crisis with Protestant virtue, cutting costs and sweating assets, to make do now in the hope of better times ahead. Yet the perverse result is that even those companies that have not gorged themselves on free money are ill-prepared for the end of the cheap dollar era. Profit margins are so thin and balance sheets so stretched that the slightest pothole may cause a crash.

If we are lucky, that possibility will not materialise. Taylor's third fear already has. In today's financially globalised world, the US dollar is the currency not just of America but of half the countries on the map. Borrowing in US dollars by companies in emerging markets stood at a staggering $4trn as of June 2015. Rising US interest rates will put the squeeze on them, too.

By far the most important participant in this global dollar economy is China. Its companies have borrowed over $1trn. Now, just when the Chinese economy is slowing, its debts are becoming more onerous as the dollar becomes more expensive.

If that all adds up to a dismal outlook for the world economy, Taylor's verdict on the state of the financial markets is perhaps even more worrying. Whereas many of us find William Goldman's verdict on the movie business – "Nobody knows anything" – remarkably apt when it comes to economic predictions, few would bet against an assessment of the financial markets from a man with Taylor's experience.

The successful co-ordination of modern capitalist economies rests on three critical supports. The first is reliable data – about company performance and macroeconomic activity – on which people can base their decisions. The second is the transparency and logical coherence of the frameworks used by powerful non-market actors: central bankers, politicians and regulators. The third is well-functioning stock, bond and currency markets, which generate prices that provide true signals to investors, businesses and governments.

Today, Taylor argues, all three supports seem ramshackle. China is the world's second-largest economy and the decisive market for most emerging economies, yet its own leaders deride its macroeconomic statistics as unreliable. The old theories of monetary policy were discredited by the crash and nothing has yet replaced them, and so no one fully understands what central bankers are doing. The financial markets, meanwhile, are dominated by computer-driven trading. They have become a postmodern parody of themselves, in which prices are determined not by economic fundamentals but by the behaviour of other prices.

With an economic and financial-market outlook such as this, the New Year hangover for stocks hardly comes as a surprise. Yet there is a germ of optimism amid this well-founded gloom. In Taylor's analysis, there is barely a mention of any of the structural economic challenges that have been exercising policymakers recently: the secular stagnation, the slowdown in productivity, the threat of technological unemployment, and so on. The problems that he foresees are, almost without exception, financial.

If this diagnosis is correct (and, in large part, I think it is), it is a reason for hope. We are not condemned to crisis or stagnation by epochal forces outside our control. It is the financial system – rules and institutions of our making – that has gone awry. The hardware of the global economy is in reasonable shape. It is only the software that has become corrupt. As such, it can be debugged. The alternative is a crash.

[Jan 17, 2016] The Price of Oil, China, and Stock Market Herding

Notable quotes:
"... Maybe we should not believe the market commentaries. Maybe it was neither oil nor China. Maybe what we are seeing is a delayed reaction to the slowdown in the world economy, a slowdown that has now gone on for a few years. While there has been no significant news in the last two weeks, maybe markets are only realizing that growth in emerging markets will be lower for a long time, that growth in advanced economies will be unexciting. Maybe… ..."
"... I think the explanation is largely elsewhere. I believe that to a large extent, herding is at play. If other investors sell, it must be because they know something you do not know. Thus, you should sell, and you do, and so down go stock prices. Why now? Perhaps because we have entered a period of higher uncertainty. ... ..."
"... Skidelsky, always good, at New Statesman. http://www.newstatesman.com/politics/economy/2016/01/optimism-error ..."
"... So like in subprime bubble investment banks were happy to give money to anybody with breath , again. There are also other connection to subprime bubble here, but of course on much lesser scale. In any case it was a kind of subprime oil . ..."
"... Collapse of oil prices not only revealed who is swimming naked (all shale patch players), but also that the US financial sector forgot nothing and learned nothing from 2008 crash and is as reckless as before, in not more. It also negatively affects conventional oil in the US and elsewhere. ..."
"... Also stock markets now are under additional pressure because sovereign wealth funds are selling their holdings to cover the deficits. And all of them were heavily invested in the USA stock market. This is essentially QE in reverse. ..."
"... I think Blanchard is too dismissive of the possibility of a significant downturn in China. ..."
"... Its not just the effect of their declining purchases of global goods to date that has people concerned. Its what the pace of decline says about their economic prospects in the near term, and how all those stories of leveraged investments in real estate and businesses in China portent possible disaster in a downturn. In other words, there is reasonable fear it will get a lot worse. ..."
economistsview.typepad.com

Olivier Blanchard:

The Price of Oil, China, and Stock Market Herding : The stock market movements of the last two weeks are puzzling.

Take the China explanation. A collapse of growth in China would indeed be a world changing event. But there is just no evidence of such a collapse. ...

Take the oil price explanation. It is even more puzzling. Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States. Consumers, with more money to spend, would increase consumption, and increase output. Energy using firms, with lower cost of production, would increase investment. We learned in the last year that, in the short run, the adverse effect on investment on energy producing firms could come quickly and temporarily slow down the effect, but this surely does not undo the general conclusion. Yet the headlines are now about low oil prices leading to low stock prices. I can think of two potential explanations, neither of them convincing.

First, that very low prices lead to such serious problems for oil producers that this will end up affecting the United States and dominating the scene. I have no doubt that some countries and some companies will indeed be in serious trouble; indeed, some already are. I can also think of ways in which low oil prices also change the geopolitics of the Middle East, with uncertain effects on oil prices. I find it difficult to think that these will dominate the direct real income effects for US consumers.

Second, that the low prices reflect a yet unmeasured decrease in world growth, much larger than is apparent in other hard data, and that the price of oil, like the celebrated canary in the coal mine, is telling us something about the state of the world economy that other data do not. There is no historical evidence that the price of oil plays such a role. But suppose, for the sake of argument, that, indeed, the low price told us that China is really slowing down. (The fact that non-oil commodity prices, for which China plays a bigger role than for oil, have decreased much less than oil does not support this interpretation.) Then, we would be back to the previous conundrum. It is hard to see how this could have such an effect on the US economy and in turn on the US stock market. Another variation on the theme, which has been raised in some columns, is that the low oil price reflects a slowdown in the United States far beyond what the other current data are telling us. There is zero evidence that this is the case.

Maybe we should not believe the market commentaries. Maybe it was neither oil nor China. Maybe what we are seeing is a delayed reaction to the slowdown in the world economy, a slowdown that has now gone on for a few years. While there has been no significant news in the last two weeks, maybe markets are only realizing that growth in emerging markets will be lower for a long time, that growth in advanced economies will be unexciting. Maybe…

I think the explanation is largely elsewhere. I believe that to a large extent, herding is at play. If other investors sell, it must be because they know something you do not know. Thus, you should sell, and you do, and so down go stock prices. Why now? Perhaps because we have entered a period of higher uncertainty. ...

So how much should we worry? This is where economics ... gives the dreaded two-handed answer. If it becomes clear within a few days or a few weeks that fundamentals are in fact not so bad, stock prices will recover... If, however, the stock market slump lasts longer or gets worse, it can become self-fulfilling. Low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession. The ability of the Fed, fresh out of the zero lower bound, to counteract a slowdown in demand remains limited.

One has to hope for the first scenario, but worry about the second. marcus nunes :

There´s certainly been a lot of recession talk. Some trends are worrisome.
https://thefaintofheart.wordpress.com/2016/01/17/the-plunging-economy/
pgl :
Olivier gives us an interesting and thoughtful discussion of different explanations. I loved his close:

"So how much should we worry? This is where economics stops giving an answer. Or, more specifically, where it gives the dreaded two-handed answer. If it becomes clear within a few days or a few weeks that fundamentals are in fact not so bad, stock prices will recover, just as they did last summer, and this will be seen as a hiccup. If, however, the stock market slump lasts longer or gets worse, it can become self-fulfilling. Low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession. The ability of the Fed, fresh out of the zero lower bound, to counteract a slowdown in demand remains limited. One has to hope for the first scenario, but worry about the second."

In the first scenario - he is saying the fundamentals suggest a recovery of stock prices. And so many people who don't get financial economics claimed the market was over priced simply because P/E ratios are above "historical averages". Of course these clowns have no clue what Olivier means by the fundamentals.

anne :
Supposing that the work of Robert Shiller is still meaningful, stock market prices have been very high. Stock market prices have been high enough that if historical pattern holds there is reason to expect either a sustained period of little gain or significantly declining prices.

Of course, I know that interest rates have been historically low. I also know that returns from corporate revenue have been increasingly going to leading executives and shareholders rather than to ordinary workers. I even know that careful analysts like Brad DeLong * think stock prices were long relatively low, though why has never been clear to me other than an unfortunate historical fear of holding stocks.

Nonetheless, Shiller's data are disturbing because the reasons for high stock prices are evidently not well understood.

* I will have to look for the DeLong analysis

Sanjait -> anne...
Consider the basic cash flow models of how stocks get priced. The fundamental model is that a stock is worth the discounted value of its future cash flows.

With this in mind, realize that stock PEs are *suppposed* to be higher ceteris paribus when interest rates are low. The discounting rate on a stock moves with prevailing treasury bond rates.

Different analysts might have different earnings forecasts and choose different discount rates to fill the model, but to a rough approximation, the low prevailing interest rates explain almost all of the spread between current PEs and historical ones.

Avraam Jack Dectis :
.
Skidelsky, always good, at New Statesman. http://www.newstatesman.com/politics/economy/2016/01/optimism-error

.

likbez :
"Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States."

He completely missed "shale oil" boom in the USA.

Essentially it was something like conversion of junk bonds into oil, as profitability of those players was questionable even when oil was above $100 per barrel. In other words that was a very expensive oil that was often sold at discount. It was all EBITDA reporting world in which new money for shale companies were very low cost and abundant. No questions asked loans.

So like in subprime bubble investment banks were happy to give money to "anybody with breath", again. There are also other connection to subprime bubble here, but of course on much lesser scale. In any case it was a kind of "subprime oil".

Collapse of oil prices not only revealed who is swimming naked (all shale patch players), but also that the US financial sector "forgot nothing and learned nothing" from 2008 crash and is as reckless as before, in not more. It also negatively affects conventional oil in the US and elsewhere.

Now there are something between $200 and $500 billion of oil related junk debt on the books on banks. And chances for them to be repaid are slim unless oil recovers to previous, above $100 levels. Of cause banks can also take equity in case of bankruptcies but assets were re-evaluated sharply down. So it's again "mark to fantasy" loans situation.

Also stock markets now are under additional pressure because sovereign wealth funds are selling their holdings to cover the deficits. And all of them were heavily invested in the USA stock market. This is essentially QE in reverse.

Some US banks can suffer a shock too. Mostly regional banks. But, for example, Well Fargo has exposure around 17 billion. Some other banks (GS?, Chase?) were also greedy. Around 20% of investment banks revenue were coming from energy. This will change. The total is not life threatening but still pretty able to cause a chain reaction. And if economy slows down and price of oil remains low (say below $50) than not only all shale companies are going to be bankrupt as they have only a limited time to "extend and pretend". There will be a chain reaction to real estate, transportation, municipal bonds, etc. Mostly limited to particular states, of cause.

For example shale oil bust will affect real estate markets in at least five states.

=== Start of quote ===

JPMorgan Chase (JPM) CEO Jamie Dimon, in a call with analysts this week, acknowledged there may be "slight negatives" for the bank related to commercial and real estate trouble in Dallas, Denver and Houston.

http://money.cnn.com/2015/01/16/investing/oil-price-fall-banks-hurt/index.html

== end of quote ===

So it looks like the situation is quite different from what Olivier assumed. IMHO if oil stays low for this year it can became pretty dangerous.

Sanjait :
I think Blanchard is too dismissive of the possibility of a significant downturn in China.

It's not just the effect of their declining purchases of global goods to date that has people concerned. It's what the pace of decline says about their economic prospects in the near term, and how all those stories of leveraged investments in real estate and businesses in China portent possible disaster in a downturn. In other words, there is reasonable fear it will get a lot worse.

Notice that global markets have been following China down. That points us to where the source of the negative surprises are coming from.

[Jan 17, 2016] Oil and US share prices tumble over fears for global economy

www.theguardian.com
Sowatree -> Ibmekon, 2016-01-14 00:24:57
I did hear on the radio last week that there appears an economic war is being played out between Saudi Arabia and Iran. Truth of this I don't know.

But, what does concern the world at these prices are major trading companies may go bust. On derivatives and oil futures somewhere someone is carrying huge losses.

And, concerning the world economy derivatives are a markets of 70 or more trillions dollars , enormous markets, as Warren Buffet once said derivatives are financial weapons of mass destruction.

Somewhere in the world financial system huge losses on derivatives are sitting.

World Politicians shied away from the tough decisions under the guise of quantitative easing. QE appears to have caused greater missallocation of resources.

2008 financial crisis is reemerging from its dormant position. 2008 was just push further down the road.

Social Cohesion in Britain needs this time to really all be in this together.

Ibmekon -> Sowatree, 2016-01-14 09:01:38
" On derivatives and oil futures somewhere someone is carrying huge losses. "

The Big Lie - "zero sum game".
If that is true - play Monopoly in your own time with your own money.
That "zero sum game" pays billions in profits - so where does the money come from ?

"Financial institutions held OTC swaps with a notional value of $505 trillion at the end of 2014, "
http://www.bloomberg.com/news/articles/2015-08-06/europe-moves-to-reduce-risk-in-505-trillion-derivatives-market

Ibmekon -> Ruth Williams, 2016-01-13 21:42:54
Would love to know that myself.
This is a much too specific question for an economist - like asking for the winner of the 2-30 at Kempton.
Perspective is always a good thing -

Debt per Citizen £24,560
Interest per Year £39,648,610,427
UK Debt £ 1,590,708,970,219
Debt as % of GDP 80.81%
http://www.nationaldebtclocks.org/debtclock/unitedkingdom

BantosaurusRex , 2016-01-13 21:14:21
This is what happens when central banks across the world inflate the biggest bubbles the world has ever seen by keeping interest rates at near zero percent for 7 years. Let's make one thing clear - China is not the only culprit for the latest fears over the global economy, to say that many western economies such as the US or the UK have recovered or are on the road to recovery would be disingenuous to say the least.

We have been scraping along at the lowest rate of so-called "recovery" (debt-fueled with ZIRP) after a recession despite these interest rates - what would it have been like if rates were increased a couple of years ago? One can only guess, but it would be fair to estimate that we would be back in a recession.

So, here we are again, back at the latter stages of the next cycle in the boom-bust oscillations of our global economy - and "is this time different"? Yes, but only by the measure that this time there is little that central banks can do to mitigate or even slow the financial crisis. The 2008 crisis never really ended, this year we will undoubtedly see that the real part of that crisis is about to unfold - capitalism should be allowed to take place this time, and if that means huge corporations filing then so be it.

Ibmekon -> BantosaurusRex, 2016-01-13 21:24:02
"if that means huge corporations filing then so be it."

I agree - but they are Ok, in fact loaded with cash.

"May 8, 2015 At the end of last year, U.S. non-financial companies held a staggering $1.73 trillion in cash, up 4% from the $1.67 trillion on hand at the end of 2013, found Moody's."
http://www.forbes.com/forbes/welcome /

So much of the debt has been loaded on sovereigns - what will they do - file for bankruptcy ?

John Olesen , 2016-01-13 21:17:29
OPEC should not allow members to sell oil at a financial loss. Oil is trading below its intrinsic value and there are serious imbalances in the market. Member countries that sell oil below market value lose money in two ways. They add supply to a depressed market and they lose money on the transaction itself. It would make much more sense for OPEC to target minimum profitability as their primary goal for all members rather than trying to use their market position to eliminate producers in the United States.

Since most of the large energy companies in the United States are publicly traded, it would be better for OPEC members to use their profits to purchase equity in these companies rather than trying to make them unprofitable. I propose that OPEC target a specific and stable price long term and then to adjust that price for inflation. For instance, if it is determined that all members can profit at 70 dollar oil, then they should lower production when the price is below that and increase it when it is above that. Member countries then use a percentage of their profits to increase their reserves with share purchases of other non-opec producers, thus increasing reserves long term.

ID7586903 , 2016-01-13 21:33:29
Saudi Arabia has again badly miscalculated. By pumping vast amount of Oil, KSA thought it could sink America, Russia and Iran oil companies and Economies
Well it seems KSA is going broke! I am celebrating...
Ibmekon -> ID7586903, 2016-01-13 21:58:05
Make of this what you will. There is talk of Aramco being floated - biggest IPO ever.
http://www.wsj.com/articles/saudi-arabia-could-list-crude-reserves-in-aramco-ipo-1452509304

Current Saudi finance minster is Ibrahim Abdulaziz Al-Assaf

"After leaving academia, Ibrahim moved to Washington, DC where he represented Saudi Arabia at the International Monetary Fund (IMF) and the World Bank
...
In addition to being finance minister, Ibrahim is a member of the board of directors of Saudi Aramco (since 1996), the state-owned national oil company,
...
https://en.wikipedia.org/wiki/Ibrahim_Abdulaziz_Al-Assaf

makesnoadasense -> ID7586903, 2016-01-13 22:03:02
I wouldn't celebrate too soon, it would appear that there is a looming $200bn debt over American oil and gas...

https://www.rt.com/business/220619-shale-debt-us-companies /

coplani , 2016-01-13 22:25:44
Is this history repeating itself?...but in China.
1998 Russian financial crisis.....Their stock market collapsed followed by a run on the ruble which was devalued.
Most Russians suffered as their pensions, wages etc were severely devalued.
Same could be happening today in both China and Russia...

Financial war....Dinosaurs versus dinosaurs.
How to wreck a country....Trash it's markets and currency.
It's the law of the jungle.....The strongest survive.
However Russia and China will not take it lying down....Scary times indeed.

It seems that the Chinese market is under the greatest pressure...only to be propped up by the government pumping money into it. (printing money)...result will be their currency devalues and everybody in China suffers.

It has happened many times to many countries before...e.g. Germany, Argentina, Brazil, Russia etc....

Ciarán Here -> coplani , 2016-01-13 23:21:25
It's not Russian or China that is "printing" money have you not heard of quantitative easing in the USA $85billion dollars a month.
Penfisher , 2016-01-13 22:28:30
Two quick points.
First, OPEC has increased flow to destabilise Russian & Iranian profits. However, this situation demonstrates that the price of oil should never have been much higher.
Second, China has a better approach to wealth re-distribution than OPEC nations and all advanced economies. If a genuine desire to increase economic activity were expressed then wealth sitting in secret accounts and held by the top 10% would be taxed & spread to the true wheel of economy: ordinary people with poor purchasing power.
bonkthebonk , 2016-01-13 22:50:54
Finally time to unwind?

When the debt merchants, the money alchemists and voracious volatility vultures start panicking (Hey, it's all relative. Don't worry, THEY'LL be fine) and looking for 'safe havens' (anything deemed to have an intrinsic value, but still not gold as, 'we're not bloody savages, y'know...yet'), when prices, particularly the golden goose commodities that kept them in (debt fertilised) speculative clover in their (hopefully fitful) sleep, start to reflect genuine economic reality, then you know it's probably squeaky bum time for the hapless cannon fodder that didn't cause this train wreck, reaped little of its rewards, but nevertheless will bear the brunt of its consequences yet again.

ronnewmexico -> bonkthebonk , 2016-01-13 22:58:38
High rate temporary debt junk bonds are already failing. Those issued on the small oil drillers. But it is a relatively small part of the junk bond market itself nevertheless financial institutions overall.
Small companies are due to fail and will. the larger ones will pick up the pieces at rock bottom prices and things will go on.
ronnewmexico , 2016-01-13 22:55:07
The numbers anywhere in developed economies don't support recession. China by the worst guesses is still par on GDP. By most takes between 4 and 7 increasing GDP. With the looming effects of el nino on India I would not say it could enter a recession in the next 6 months but that would be a isolated event. The US no where close. People are taking the low oil prices as a read on the economy. It is not this time global consumption is going up not down. It is a supply glut.
SirWillis -> ronnewmexico , 2016-01-14 00:39:56
I live near KSA, and I see first-hand how corrupt and morally bankrupt the whole thing is. I also see how incredibly subsidised EVERYTHING is. The people of these countries are little more than spoiled children, with no incentive to work properly or even understand the businesses they are in. Russia has a much more diverse economy, in KSA it is almost entirely oil. The rest of it is industries that rely on oil money - such as the construction sector.

Offering an IPO on KSA's oil will expose the total incompetence and corruption behind the company, I don't know how they hope to hide it all. So, you're right, all is far from well. I will be packing my bags at the first sign of revolution, which I predict will be in 3-5 years. I don't think people yet realise how bad things are going to get once KSA implodes and Iran and ISIS seek to take advantage. It's going to be ugly, and I must admit, I'm a little scared.

PhilPharLap , 2016-01-13 23:21:51
the reason you have a collapsing global economy is because the idiots created one through a battery of Free Trade Agreements that were aimed at over -riding local sovereignty and democracy and accessing scab labour on an international scale

It didn't work did it - by dismantling local industry and exporting manufacture to countries like China the middle class in the West made itself redundant

Welcome to the great unwashed guys - you are one of us now and with less skills to survive - I don't think your economic and managerial skills will impress anyone

You did it all to yourselves ...Get in the queue for the welfare you denied others - and reflect:

"So the last shall be first, and the first last: for many be called, but few chosen."

Or alternatively put - "and wait your turn!"

ronnewmexico -> ronnewmexico , 2016-01-13 23:52:05
People are confusing the stock market with the economy. The economy is ho humming along. The market is artificially inflated in value by above stated factors. Not by a whole bunch but enough to make a sell off of minor sort a probable.
Earnings will once again be real and not a thing of less stock per earning share., Report
AshleyPomeroy -> ronnewmexico , 2016-01-13 23:59:03
I wish I could upvote this twice. It's not like e.g the dot.com crash, where a bunch of hopeless money-losing pipe dreams fell apart. Facebook, Apple et al actually make a profit and have a niche, it's just that with so many other investments offering desultory returns, the stock market has been pumped up by desperate speculators.
Blackbag1999 , 2016-01-14 00:21:18
I am not sure why people think the Saudis are in trouble.

Most of the shale is becoming uneconomical to recover if you believe the forward curve. $50 oil for 5+ years, they will need closer to $100 to go back to the capped wells. The frackers are just taking the first 30% of the cheapest oil to produce (1st 18 months), capping and moving on. They are churning through oil reserves at 3 times the rate to do it.

They can still do it until they get to debt repayment. Anyone thinking the industry got ultra efficient over night is optimistic feller.

The reality is shale gas is not the primary concern. They want rid of artic, deep water and tar sands. My guess is the Saudis would be more than happy to let the US be the swing producer as shale is far more flexible. Shale was the trigger not the problem.

mrfunbro , 2016-01-14 01:43:18
I'd be quite happy to see the whole stock market free fall. The current inequity and greed deserves it's reward. Money for nothing investors and free loader corporations that don't pay their share of taxation will be the ones who go down. A new system is required to break away from the old established power and energy companies that have led us to the brink of devastating our planet.
backatchya , 2016-01-14 02:00:21
The capitalists are the victims of themselves. Fortunately for them, they own the wealthiest states on the planet. And therefore, can always expect welfare, social assistance and
bail-outs whenever they burst another bubble. Socialism for the rich.

We are a stupid species to put up with this casino scam. If you disagree with the ponzy scheme, start by supporting Sanders in the U.S. and Corbyn in the U.K. At least it's a modest beginning to opposing these criminals.

If_Not_Why_Not , 2016-01-14 02:50:01
China stock piling oil is a good idea, may help explain recent capital outflows , of which the article does not explain the opaque /nebulous financial details of these movements. It maybe China shuffling pieces on a board.

"The country's global trade surplus widened by 21% to $60bn in December. Over the whole year it was $594bn. The country's trade surplus in December with the European Union, its biggest trading partner, increased 36.8% to $15.6bn. The surplus with the US contracted 6% to $19.4bn."

No doubt the figures need to treated like all PRC figures.
That said it is undeniable that China had another huge trade surplus.
Yet despite this they manage to cheat on their exchange rate and devalue the Yuan.
The Currency/Trade Wars are in full swing..

HollyOldDog -> litesp33d1 , 2016-01-14 14:32:01
By then then most of the oil residues, waste and plastic products will reside in the Worlds Seas and Oceans. I've not seen much movement to remove the plastic gyres floating around the Southern Pacific Ocean. Land waste management has serious flaws as well. The only 'waste management ' in the UK that is booming is all the junk that motorists chuck out of their cars when mobile - they must think that plastic bags hanging from tree branches 'adds' to natures wonders. In a resturant car park the other day were 2 used babies nappies left in a parking bay - some people are scum and these couldn't have been poor.
Peter Sembol , 2016-01-14 03:35:11
Incredible how low the West in cahoots with Saudi Arabia will stoop, and all in an attempt to crush Russia economically and politically. And the media continues the deceptive narrative about troubles everywhere, brought on by 'competition' among oil producers, except pointing to the true and only reason behind the low oil price. The public in general swallows the 'explanations' forgetting that the ball started rolling downhill immediately after the USA twisted Germany's and other western European countries to impose sanctions on Russia in retaliation for it's welcoming Crimea back to the Motherland. In the name of this geopolitical game, the good people of USA, Canada and other countries whose significant part of income derives from natural resources and related products, are loosing their jobs by the thousands. All is well and according to the plan, as long as Russia suffers more than the West, and will be the first to bite the dust. The world economy will then be turned around to everyone's relief.
MattSpanner , 2016-01-14 04:43:08
Seems the FED's recent interest rate rise was premature. If another 2008 does happen calls to abolish it will grow ever louder, especially since economic chaos will smooth Trump's path to the White House, and Trump has made FED abolition one of his campaign pledges. After repeated failures catastrophes under Greenspan, Bernanke and now Yellen it seems the FED is surplus to requirements., Report
NWObserver -> MattSpanner , 2016-01-14 05:35:59
What will they do after abolishing the Fed? Will they have a single national currency or allow each bank (or any other entity) to issue its own currency and let these different currencies compete with each other?

If they continue to have a single national currency, who will issue it and set the monetary policy? Another Central Bank or the government? If it is going to be another Central Bank what exactly is the point of abolishing the Fed? Why not change the law to allow the government to remove the Fed's board of governors and appoint those they think are more competent than Janet Yellen and other governors, since abolishing the Fed will anyway require the repeal of the law establishing it i.e. it too needs Congressional approval. If the government is going to be issuing the currency and set the monetary policy, in what way would it be superior to the Fed doing the same?

If they allow any entity to issue its own currency, what currency will the taxes be denominated in?

ronnewmexico -> MattSpanner , 2016-01-14 05:42:12
Well the predictions were for four rate hikes in the year. Now perhaps we see two. The one already and another. Things get better and it is up to four. The dow only dropped three hundred or so and the S and P is above its support level, which is about 1857 to my dim recollection.

So till we exceed that support to the downside, really things are not bad. A wash out was probably a necessary thing.

I think people are overdoing this thing. The media seems to be hyping the decline which may account for all the sell side prognostications.
Earning are just beginning. If I see indications that earming are the mover behind the sell off I would have concern. Alcoa all things considered was not that bad. Certainly not as bad as the tape today. OIl by my guess is the real mover as the new lows have people spooked.
I am not to worried it can flip up or down but it really is only a small part of the market nowadays not what it was in yesteryear.

So I repeat this is overdone, that is my opinion. Those calling gloom and doom on this action, no offense but this little resembles any major sell off of a lasting duration spiral down. What is the mover….low oil prices? The rest of the market benefits from low oil prices.

Sentiment can drive things lower but really only for so long. Chinas last numbers reported were better than expected. Me being cynical and seeing the talking heads talking things down anticipate it is the big money movers trying to create some action on the short side. How long they keep this up is a guess. But it requires someone to keep pressure on to move it down. Without new bad news on China, what is the precipitive factor….nothing new here.

ekaai Kaewaniti , 2016-01-14 05:52:46
Unfair market system, Complete waste of time, energy and resources. Destroy all the stock markets along with corporations and Banks. It is time we stop playing this ridiculous economic game and start concentrating on the real issues that we are facing. Poverty, Conflicts in the middle east, environmental degradation, climate change, and many more. What is the root cause of all of these problems? Yes it the socioeconomic system capitalism with its flawed monetary system owned by the corporations and the Banks that does not care about the well being of planet or nature and the well being of all human beings but only care about their own wealth, power, fame, egos. Such idiots!!!!! stop playing their game and move to a new fair game called RBE and other similar systems.
werdzwerth , 2016-01-14 07:17:28
It is very stupid of us to base our economy on something as unstable and selfish as the Stock Market, as well as something as unstable as governments, democratic and otherwise. It is about time we became as intelligent and clever as all these whizz kids who invent amazing technology and make amazing discoveries. It is about time we became whizz kids at organising an intelligent and reliable economy. For us.

Why do banks charge an interest on loans? If the function of money is to get the economy started and running, then the work done and the profits made should be a sufficient reward. Banks could actually give money away on a non-return basis, so long as the money goes to people who will spend it, this spending lending to more spending.

Perhaps the private owners of the current private currencies want more than a sound economy, perhaps they want power, and want to exercise this power just to know for real that they have it? Perhaps they are not fully-fledged human being animals but suffer some form of genetic or social affliction that makes them behave in dangerous anti-social ways? Perhaps they don´t give a fig about other human being animals - other than those who serve their biological wants and needs? Perhaps shareholders are afflicted in the same way?

Perhaps we could form our bank to issue our non-returnable money, and even decide what work is worthwhile and is done and what work is not worthwhile and so will not be done?

Millions of years ago, so we are told, some fish came out of the sea and survived. What I am suggesting is a work and economy evolution of a similar scale. Current economic theory has us all drowning in the quagmire of self-interest-driven chaos, self-styled as a "social science". Perhaps we could come out into fresh air and create a diversity of human activity on a par with the diversity of living things on land and in the air that came from those first brave fish that ventured beyond known limits?

Columbus did not go over the edge of the world but discovered a whole New World.

Perhaps we need to go beyond even the "thinking outside the box" box?

Thank you.

criminalswelcome , 2016-01-14 07:35:29
Who funds international terrorism try the oil rich countries in the Middle East so let's assume the Yanks have got smart for once and are flooding oil market to bring down these economys .
The end game is destabilise them then pick up their oil industries for a song and influence just who makes Middle Eastern policys by economic means .
Bit of a dream but hey nothing falls down in price to this extent without a hidden reason given its a fossil fuel that should be rising to maintain supplies for the long term .
litesp33d1 , 2016-01-14 08:09:40
The economy is like a super tanker and these results are still the effect of the ripples of the economic crash almost a decade ago. The result of lower oil prices will be that ordinary people will start to realise they have more disposable income than they did a year ago and start spending that money on more shit they don't need and the economy will swing back with a vengeance.
paddyryan , 2016-01-14 08:24:08
Well surely all those neoliberal economists can't be wrong....it must be the fault of that evil Mr corbyn and his army of trotskyists.....HA HA we are on the slippery slide to another global crash folks ...
SeeNOevilHearNOevil , 2016-01-14 08:45:19
Sigh....the stock market....virtual money and speculation...Worst thing ever created causing insane chain effects in economies. Although....why were economies booming before when Oil price was low? Cause sure oil companies profits go down, but every other business that uses the oil increases their profit. Isn't this also a good reason to start doing something about being so oil dependant?
humbleandpoor , 2016-01-14 09:50:16
Once in a lifetime chance for the USA to escape from the strangle whole of the Saudi oil grip.
Fracking gives them a chance to break with the Saudi s or even break them for good.
Failure doesn't t bear thinking about, and we all know where Obama s sympathies lie - but in modern America who cares.. the battle is between the giant bureaucracies, not the democratic froth on top of the cake.
Always remember America in you hour of destiny there were Americans long before there was the USA . And will be long after it is gone. And for the love of God .. COLUMBUS did not discover America. Which ironically is named after a Welch sheep farmer.?
Americo FrontHoovesintheWellies was his full name. Knew a thing or two about sex and sheep., Report
Eugenios -> humbleandpoor , 2016-01-14 15:28:25
Most US oil comes from Canada and Mexico, a very small percentage from Saudi Arabia. But they have enormous financial influence through bonds, obviously, and buying media and politicians. Also Israel and Saudi Arabia have been working together under the table for some time, as was obvious during the Gulf War, and now in their efforts to begin a war against Iran. Fracking has never been any threat to the Saudis--the cost is too high. Their present lowering of oil prices is directed against Russia, surely in cahoots with the US.
HeadInSand2013 , 2016-01-14 17:54:25

Oil and US share prices tumble over fears for global economy.

The economists have been telling us that there is little danger for the US economy to be pushed into recession by a slow-down in the Chinese economy - referred to here as "global economy". More importantly, in election years the US Markets have never been good indicators of the US economy, anyway.

The real reasons for the US market plunge are the trades conducted on behalf of the Wall Street tycoons and the Saudi Royal Family. Both are doing their best to push the markets down, because they are deeply worried of having another Democrat in the White House, come January 2017.

The Wall Street tycoons are apprehensive about getting dragged into courts for their financial mischiefs during the last decade. The Saudis are concerned that the US leaning further toward Iran, which will encourage their internal oppositions to demand reforms, which could include getting rid of the Royal Family. So, both the Saudis and the Wall Street tycoons have a common cause. They will "keep at it", until they can be sure that the next US president will be a Republican.

Eugenios , 2016-01-14 18:45:56
"National debts, i.e., the alienation of the state – whether despotic, constitutional or republican – marked with its stamp the capitalistic era. The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt. Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven.

The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter's wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation – as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven – the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy."

Karl Marx

[Jan 17, 2016] Oil price woes deepen as Iran vows to add 500,000 barrels a day

Notable quotes:
"... America threatened Russia some time ago about meddling in the affairs of Syria ..."
"... The US is really going for broke on crashing the oil price ..."
"... All of this to try to contain Russias military rearmament made possible by sky high oil prices ..."
"... Has the west finally gotten wise to the Saudi money that flows into extremist groups? Would seem so. West seems to be doing everything it can to contain the Saudis. eems to be doing everything it can to contain the Saudis. ..."
"... Yes because of millions of refuges that Arab countries caused by supporting ISIS it is completely natural for west to go after Saudi Arabia and its allies sponsor of ISIS. So they got what they deserved. Today I also read that the markets in Saudi Arabia, Qatar and Emirates collapsed and I think this a beginning of an end for them. ..."
"... The Iranians deciding that their revolution has matured sufficiently for them to plainly state we dont wish death on anybody, our religion is about peace, and to demonstrate our sincerity well urge our people to stop such rhetoric would contribute to Irans rehabilitation as a more or less normal member of the global community of nations. ..."
"... This has to be the beginning of the end for the Saudis and Qataris and their utter crapulence, all at the expense of the rest of the World. OPEC has no answer for this and is completely impotent to do anything about it. The cartel is busted. ..."
"... And so it seems with oil. There has to be a base production cost which doesnt vary and I doubt that the Saudis or Iranians are selling it at under that cost - they both need a modest profit - so, one wonders, if they can make that modest profit at $30 a barrel, think how much they were making at $100 ..."
"... The U.S and Iranians are using each other against their own allies. U.S is using Iran to put pressure on Saudi so that they keep producing more oil to bankrupt Russia, despite it destroying Saudi economy. Iran is using USA as a counterbalance to Russia because as much as they want Russias help, they dont want Russia to become too strong in the region. ..."
"... In my view Iran was never quite the bad guy that the western governments portrayed it to be. We certainly have differences. But if you compare Iran and Saudi Arabia there is no contest - Iran is far less a bogeyman. ..."
www.theguardian.com

The Guardian

Sean Mcmahon , 2016-01-17 19:10:22
The funny thing is that the sanctions have probably helped Iran as it had to survive with less. Iran now gets access to it's foreign banking about 50billion net and can start exporting again.

Saudi is burning through its reserve cash and it's populace are used to getting things for free, will they survive low oil revenues like Iran or is the House of Said on the brink of annihilation? Talk about shooting yourself in the foot!

It's amazing how detrimental oil has been to the middle east. If only they could have gone down a similar path to Norway....

Jahanzeb Ahsan , 2016-01-17 18:56:59
Seeing Iran to go into economical slow down was a depressing sight. OPEC definitely took a huge share of IRAN'S oil fortune and that time can not come back. PART of it was Iran's fault agreed, but since Iran's sanctions are lifted you cant blame it.

It's just taking a share of what it has lost in years. This will indeed afftect gulf region and other oil exporting countries but HEY BACK TO REALITY!!! Indeed its bad time since oil is already record low thanks to Fracking. This time is like dubstep for environmentalists who are dancing on oil price beats. No one is actually explaining the actual picture behind the scene as hundred of thousands of jobs are being slashed. Its like a death sentence for oil workers like me. 1 year since graduation as a petroleum engineer still no job worried to pay debts and there are countles like me. In short low oil prices won't make things better but worse.

Xavier Cournet , 2016-01-17 16:21:17
"The French-listed aircraft maker Airbus also looks set for a significant boost from the sanctions ending"
It is the first time, a British newspaper says "French aircraft maker Airbus". Yes Airbus is principaly a French company and not a European one contrary to what British newspaper often say.
ID241823 -> lifeintheusa , 2016-01-17 17:24:40
Indeed...the magic answer is interesting to say the least. America threatened Russia some time ago about meddling in the affairs of Syria and other cooperative business tactics. This manipulation is more about the benefits beneath mainstream media...plus, it is an election year...of course, oil is welcome and plentiful...somehow...it always is election time...though the added incentive does make Russia cringe a bit...these United States knew the only way to allow Russia to feel pinched was this way...so her and her cohorts have combined efforts to achieve their goals. Hmmm...
MerlinUK , 2016-01-17 14:41:56
Hammond is such a prostitute with his comments. They have been sucking up to Saudi/Qatar and UAE for decades, but now they are all on the slippery slope, he says 'dump them all and start courting Iran'. The man has no shame whatsoever.
opyniated -> MerlinUK , 2016-01-17 15:15:12

dump them all and start courting Iran

Best thing he has said in his career. Dump the wahhabi sheikhs while your heads are still standing on your shoulders.

sokolnik100 , 2016-01-17 14:28:57
The US is really going for broke on crashing the oil price:-
1 Deal with Iran (to increase supply)
2 Saudis pumping as much as they can (favour to US who turn a blind eye or help their regional aspirations by financing ISIS and AQ)(note the price was going nowhere until Ukraine/Crimea appeared then suddenly it started going down whilst Saudi currency actually appreciated)
3 Letting the US export oil (more supply)
4 Letting Turkey take oil from ISIS (more supply)

All of this to try to contain Russia's military rearmament made possible by sky high oil prices.

DDDFFF -> sokolnik100, 2016-01-17 14:38:39
that's correct as well as containing the Saudi, Qatari sponsored terrorist groups
ElfenLied2 -> DDDFFF, 2016-01-17 14:50:05
I thought that the Saudis see the terrorism as their own failure as well?

It's not controversial that it is oil money that has caused the situation, but the Saudis seem as powerless as anyone else to stop it.

Glenn Middleton -> sokolnik100 , 2016-01-17 14:50:16
Remind us why so many shale producers in america are going bust because of oil prices.
DDFFF , 2016-01-17 14:19:04
May the terrorist funding by Saudi and Qatar comes to halt by cheap oil prices. They had made the decision to make it cheap but it is not Iran's decision to make it expensive again. Which believe me Iran doesn't like to do so especially that through the sanction years Saudis, Qatar, Emirates played a nasty role in OPEC by getting rid of production sluts(it was to do by limiting each member to a certain production level but as Iran was sanctioned they thought it is the best way to hurt Iran's share of OPEC by getting rid of it) now this is the only reason they cannot increase the oil price as well as they cannot control Iran's production . Iran will produce even more and has a fresh supply of Cash and its economy is more robust to be only based on Oil so what I want to tell the Saudis, Qatari, Emirates and their allies is to fuck off . Because through these years you were sponsors of ISIS, Cause hundreds of thousands of death tolls and millions of refuges in the world that you have not taken a single refugee and the whole EU and North Americas must pay for it now. YOU GOT WHAT YOU DESERVED ARABS. Hope Iran become friend with Israel too and teach Arabs another lesson.
MerlinUK -> DDDFFF , 2016-01-17 14:39:49
Recent events with Saudi princes assaulting maids in the US (then claiming 'diplomatic immunity' and skipping the country before charges could be laid against them) could also be a factor, as it has woken people up as to what the Saudis are really like.

The highway between Bahrain and Saudi/UAE is like the M25 at weekends, with Wahhabi hypocrites rushing to Bahrain to get pissed and laid. It's been like that for decades. They claim to be pious and expect their subjects, contractors and ex-pats working out there to do as they say, not as they do.

Tresidentevil , 2016-01-17 14:18:48
Saudi Arabia is therefore finished as a regional power. Economy crippled by low oil prices. Iran meanwhile has had to endure an embargo for a decade, resulting in a tougher economy that is far more diverse.

Has the west finally gotten wise to the Saudi money that flows into extremist groups? Would seem so. West seems to be doing everything it can to contain the Saudi's. eems to be doing everything it can to contain the Saudi's.

DDDFFF -> Tresidentevil, 2016-01-17 14:26:32
Yes because of millions of refuges that Arab countries caused by supporting ISIS it is completely natural for west to go after Saudi Arabia and its allies sponsor of ISIS. So they got what they deserved. Today I also read that the markets in Saudi Arabia, Qatar and Emirates collapsed and I think this a beginning of an end for them.
MerlinUK -> Tresidentevil, 2016-01-17 14:35:26
It really brings David Cameron and the Tories' sucking up to the Saudis into clear perspective, doesn't it, as their credit rating for buying arms will be taking a nosedive. Watch BAE Systems shares start to wobble this coming week.

It also leaves the Royal family in somewhat of a quandry, as who is Price Charles going to sword dance with now?

FunctionalAtheist , 2016-01-17 14:02:50
Iran adding to the current supply glut in oil was an inevitable consequence of the deal. Still, the timing is particularly bad, with the crash in commodities feeding a gloomy mood in stock markets around the world.

A deflationary spiral for the global economy is now a little more likely, with excess capacity in a range of manufactured goods, from steel to I-Phones, in addition to the glut in oil and other commodities.

But, that glut is not Iran's fault. The prisoner exchange was good to see.

Next I'd like to see a symbolic move by Iran: move on from the "Death to America" (and Britain, and Israel) rhetoric. Islam needs some public relations help. The Iranians deciding that their revolution has "matured" sufficiently for them to plainly state "we don't wish death on anybody, our religion is about peace, and to demonstrate our sincerity we'll urge our people to stop such rhetoric" would contribute to Iran's rehabilitation as a more or less "normal" member of the global community of nations.

MerlinUK , 2016-01-17 13:53:33
This has to be the beginning of the end for the Saudis and Qataris and their utter crapulence, all at the expense of the rest of the World. OPEC has no answer for this and is completely impotent to do anything about it. The cartel is busted.

I guess that nobody likes the Wahhabi hypocrites any more.

StuartHX , 2016-01-17 13:39:21
I suppose it all depends on how much Iranian oil is pumped into the system as a proportion of the total, but then what is the 'right' price for oil anyway?

It reminds me of a supermarket conundrum - 'What's the price of a packet of Pringles?'. This comes from the notion that in one supermarket they're £1 each or two for £1.50, in another they're £1.25 but one a 'buy one get one free' deal, in another they're £1 each but buy two and get one free... and so on. But not only this - all of these deals change weekly.

So you begin to wonder, given that a packet of Pringles costs the same to make whatever price they're sold at - and the manufacturer wants to make a modest profit - why can you never determine the true price?

And so it seems with oil. There has to be a base production cost which doesn't vary and I doubt that the Saudis or Iranians are selling it at under that cost - they both need a modest profit - so, one wonders, if they can make that modest profit at $30 a barrel, think how much they were making at $100

copyniated , 2016-01-17 13:32:13
Apparently, according to reuters, Saudi Arabia paid Somalia a $50 million bribe to break diplomatic relations with Iran. Iranians, themselves, would have paid the Somalian government more to beak off diplomatic relations.

But hey, why complain? It's free! Cheers 'Salman the Barbarian'!

copyniated -> Katrin3, 2016-01-17 17:06:42
Saudi Arabia, Israel, Bahrain, Sudan, Somalia, United States, The Comoros and Djibouti all do not have diplomatic relations with Iran. UAE recalled its embassador in sympathy with Sheikh Salman the Barbarian. Iran needed UAE before as it was used as a port for importing into Iran(a sanction busting avenue) but since sanctions are lifted, middlemen are no longer required which means UAE will lose an annual income of $11 billion and Iran will gain. Very sad!

I hope that The Comoros and Djibouti will soon reestablish relations because it is hurting Iran's economy.

Vizier , 2016-01-17 12:57:10
'The UK has played a central role, and I hope British businesses seize the opportunities available to them through the phased lifting of sanctions on Iran. ' said Philip Hammond.

His department was instrumental in sanctions against Iran while other countries, particularly Germany and France, were lukewarm. Which countries will now benefit? Answers on a postcode, marked 'Clue', to Philip Hammond.

Phil_Paris , 2016-01-17 12:45:31
Iran is closer to a development [nations] like Turkey than to Saudi Arabia. Saudis have always been unable to do anything else than watch oil go out of pipelines into tankers, they have no agriculture, no industry.

Iranians want to industrialize like Turkey, but that doesn't mean democracy and personal freedom. Development gives more means of control and repression to autocrats too, like we have seen in Russia, Turkey, continental China. Not all countries are able to move to democracy like Taiwan and South Korea

TomBakerIsGod , 2016-01-17 12:23:25
It is hard to understand why the Guardian labels low oil as an actual woe for the World. It mainly hurts countries like Russia and Saudi Arabia, while in the West we all benefit from cheap fuel.
copyniated , 2016-01-17 12:18:08
Doubt it. The news was already in the market and has been for some time. No surprize.

Even if does go further south, it would be temporary and besides the wahhabi regimes of Arabia are the ones who will suffer the most. Either way, good news for Iran.

SchraderBrau -> copyniated, 2016-01-17 14:34:34
The U.S and Iranians are using each other against their own allies. U.S is using Iran to put pressure on Saudi so that they keep producing more oil to bankrupt Russia, despite it destroying Saudi 'economy'. Iran is using USA as a counterbalance to Russia because as much as they want Russia's help, they don't want Russia to become too strong in the region.

The (seemingly) more likely scenario is to make the excuse for war against Iran this year.... "We really tried with these guys but now we have to 'regime-change' them". That will result in a MASSIVE war.

A less likely scenario is that USA (at a shot to nothing) thinking they might actually replace saudi oil-fields propping up the $ with IRanian ones. And Iran (at a shot to nothing) thinking they might take the U.S out of Israel's pocket. As unlikely as either of these scenarios are, all bets are off this year. Both those latter plays could push Israel and Russia closer together, resulting in a MASSIVE war which the U.S would lose.

Either way, a MASSIVE war is coming and this development is more significant than people think.

Vizier -> MrPeevley, 2016-01-17 13:05:51
In my view Iran was never quite the bad guy that the western governments portrayed it to be. We certainly have differences. But if you compare Iran and Saudi Arabia there is no contest - Iran is far less a bogeyman.

It is always worth remembering that nearly all the September 11 hijackers were Saudis, none were Iranian. ISIS was funded and armed by Saudi Arabia, not by Iran. You can draw a direct line from Saudi Arabia through the carnage in Iraq and Syria directly to the terrorist attacks in Paris.

Whenever the west talks about 'Iran being a state sponsor of terrorism' they mean one thing and one thing only: Hezbollah.

Disclosure: I have a low opinion of Saudi Arabia so my comments are biased.

[Jan 16, 2016] Is this the end of the bull market?

www.cbsnews.com

Whether the losses deepen or an oversold rebound materializes depends mainly on two things: Crude oil prices stabilizing (despite the lifting of Iranian oil sanctions) and the Fed delaying further rate hikes (until market confidence has been restored).

The economic data certainly supports a dovish turn by the Fed. Headline retail sales dropped 0.1 percent, with 2015's performance by consumers the weakest since 2009. Industrial production fell a larger-than-expected 0.4 percent in December. U.S. freight volumes are falling for the first time in three years. Wal-Mart (WMT) is firing 16,000 workers and closing 269 stores globally.

[Jan 16, 2016] Welcome to a new era of volatility on Wall Street

Notable quotes:
"... It was easy for many years, says Bill Barker, portfolio manager at Motley Fool Asset Management, whose three mutual funds control about $600 million. That was not an accurate display of what happens in the market all the time. ..."
"... Over the past 12 months, an investor in an S P 500 index fund has lost nearly 5 percent, including dividends. But over five years, they're up a total of 60 percent, and over 10 years, they're up 79 percent. ..."
"... From 2012 until last summer, investors basked in a market where the Standard Poor's 500 rarely had a bad day. The widely followed index fell more than 1 percent less often than Los Angeles has rainy days, about 8 percent of the time. During that span, the S P 500 also completely avoided a correction, which is what traders call a sustained drop of 10 percent. ..."
"... What makes the volatility even more painful to endure is that many analysts are forecasting stock returns to be lower this year and in the coming years than in the recent past. So investors are facing the prospect of higher risk without much higher reward. ..."
www.cbsnews.com

The vicious drops feel even more unsettling because they're such a departure from the placid and strong returns that investors had been enjoying for years. Like vacationers returning from a warm beach to a slushy commute to work, the shock of change is making something already painful even more so.

Now investors just need to get used to it, analysts say. "It was easy for many years," says Bill Barker, portfolio manager at Motley Fool Asset Management, whose three mutual funds control about $600 million. "That was not an accurate display of what happens in the market all the time."

The painful return of big price swings serves as a reminder that investing in stocks can be harrowing, especially if investors focus on the day-to-day moves.

That's not to say investors can't still win over the long term. Over the past 12 months, an investor in an S&P 500 index fund has lost nearly 5 percent, including dividends. But over five years, they're up a total of 60 percent, and over 10 years, they're up 79 percent.

It's just that analysts expect the volatility to continue. The remarkably calm stretch from late 2011 through last summer was an anomaly.

From 2012 until last summer, investors basked in a market where the Standard & Poor's 500 rarely had a bad day. The widely followed index fell more than 1 percent less often than Los Angeles has rainy days, about 8 percent of the time. During that span, the S&P 500 also completely avoided a "correction," which is what traders call a sustained drop of 10 percent.

... ... ...

What makes the volatility even more painful to endure is that many analysts are forecasting stock returns to be lower this year and in the coming years than in the recent past. So investors are facing the prospect of higher risk without much higher reward.

[Jan 15, 2016] What If There Is No Fed Put - Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time

Notable quotes:
"... His conclusion: Global equity markets are suffering so far in 2016 because the Fed's primary policy has shifted from protecting asset prices to protecting the exchange value of the dollar. Buy USDs and Treasuries ..."
"... Yeah, I think you cant have your equities implode and expect the world to still clamor for your currency and government bonds. The categories are linked by confidence in the U.S. economy. ..."
Jan 15, 2016 | Zero Hedge

His conclusion: "Global equity markets are suffering so far in 2016 because the Fed's primary policy has shifted from protecting asset prices to protecting the exchange value of the dollar. Buy USDs and Treasuries"

If he is right, watch out below, especially if hints such as this one by San Fran Fed president John Williams, who famously admitted several days ago the Fed was wrong about the "benefits" from crashing out, are an indicator of broader Fed thinking:

  • WILLIAMS DOESN'T SEE SIGNS ASSET VALUES DEPRESSED, BELOW NORMAL

With the WSJ adding that "Market Volatility Unlikely to Deter Rate Rises Over Next Few Years" - hardly what the abovementioned desperate traders wanted to hear...

NoDebt

It's time for some Bob DiNiro from Copland:

You blew it!

https://www.youtube.com/watch?v=hqPRwq3QJsk

Manthong

It all depends upon how a handful of banks are positioned.

F the rest of the country and world.

NoDebt

"We disagree. The Fed no longer works implicitly for equity investors (i.e., "the Fed Put"); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt. By raising rates, it increases the exchange value of the U.S. dollar."

Even if the assumptions are correct, just look where the BOJ ended up seeking precisely those same goals.

herkomilchen

Yeah, I think you can't have your equities implode and expect the world to still clamor for your currency and government bonds. The categories are linked by confidence in the U.S. economy.

[Jan 15, 2016] Art Cashin Comments On Today's Crash The Fed Will Try Anything

Zero Hedge

"The Fed will try anything," warns Art Cashin, calmly explaining that markets "are in 'deep concern' mode," currently and if the S&P hits 1857, "there might be another whole new round of selling." The Fed's solution, Cashin stoically explains to a dumbstruck CNBC anchor, that "it doesn't matter that it hasn't worked in the past," The Fed will unleash moar QE to save the world.

The venerable Art Cashin unleashes some rather uncomfortable truths and no one dares disagree with him...

[Jan 15, 2016] Bill Gross' Advice To Traders As Stocks Crash

Zero Hedge

Some more Gross courtesy of Bloomberg:

... ... ...

In his e-mail, Gross said that zero-percent interest rates and quantitative easing created leverage that fueled a wealth effect and propped up markets in a way that now seems unsustainable.

His conclusion: "The wealth effect is created by leverage based on QE's and 0% rates."

In other words, it was all an illusion.

[Jan 14, 2016] Neoliberalism was also economics departments orthodoxy for decades

Notable quotes:
"... It should never be forgotten that the conservative orthodoxy -- of low taxes on the wealthiest, deregulation of finance, small govt deficits, and the need for inequality to spur individual initiative -- was also economics departments orthodoxy for decades. Economists put their imprimatur on this whole mess, with VERY few exceptions. ..."
"... 70% of the population STILL believes that federal deficits are a big problem, and also believes that this is standard economic orthodoxy. Until the crash, most people were ready to accept some degree of privatization of Social Security, and Martin Feldstein pushed on this repeatedly with no counterargument from the economics departments. The Clinton economic team was instrumental in pushing financial deregulation, upon the supposed orthodoxy that it is good for the economy. Even the worst nonsense in Friedmans Capitalism and Freedom and Free to Choose barely saw any push-back from other economists in the op-ed pages. ..."
"... Reaganomics was approved by most economists either through mood affiliation or intellectual incompetence. That 70% currently includes college graduates who took economics classes and traders on Wall Street. ..."
"... Nonsense. Polls of profession economists opinions abound. Reaganomics/neoliberalism has predominated in economics until recently. On a few big issues (notably, on whether the size of federal deficits as % of GDP should be reduced) the split remained even. ..."
economistsview.typepad.com

Lee A. Arnold :

It should never be forgotten that the "conservative orthodoxy" -- of low taxes on the wealthiest, deregulation of finance, small gov't deficits, and the need for inequality to spur individual initiative -- was also "economics departments orthodoxy" for decades. Economists put their imprimatur on this whole mess, with VERY few exceptions.

It's been a first-rate intellectual scandal, perpetrated by some of the biggest names in the economics racket, and with most of the lesser lights tagging along, for fear of ostracism.

And most of them STILL don't have a clear view of what the real problems are.

Lee A. Arnold -> anne...
70% of the population STILL believes that federal deficits are a big problem, and also believes that this is standard economic orthodoxy. Until the crash, most people were ready to accept some degree of privatization of Social Security, and Martin Feldstein pushed on this repeatedly with no counterargument from the economics departments. The Clinton economic team was instrumental in pushing financial deregulation, upon the supposed orthodoxy that it is good for the economy. Even the worst nonsense in Friedman's "Capitalism and Freedom" and "Free to Choose" barely saw any push-back from other economists in the op-ed pages.

"Conservative orthodoxy" can be laid squarely at the feet of the economics departments, up until the crash. If the ones who are supposed to know better, don't make a concerted effort to refute the tons of nonsense spouted in the name of economics, then they should resign their tenure.

Lee A. Arnold -> pgl...
It most certainly WAS taken as the orthodoxy. Reaganomics was approved by most economists either through mood affiliation or intellectual incompetence. That 70% currently includes college graduates who took economics classes and traders on Wall Street.
pgl -> Lee A. Arnold ...
"Reaganomics was approved by most economists either through mood affiliation or intellectual incompetence."

Not even remotely true. Criticized by liberal economists. Blasted by the conservative economists who refused to work for the Reagan White House. Even blasted by a young Greg Mankiw but that is before he drank the Bush Kool Aid.

Lee - your claim here is just wrong. And the more you defend it, the worse it gets.

Lee A. Arnold -> pgl...
Nonsense. Polls of profession economists' opinions abound. Reaganomics/neoliberalism has predominated in economics until recently. On a few big issues (notably, on whether the size of federal deficits as % of GDP should be reduced) the split remained even.

(1992 -- responses from 464 US economists):

  • "A large federal budget deficit has an adverse effect on the economy" 78.7% agree (includes 'agree with provisos').
  • "The money supply is a more important target that interest rates for monetary policy" 56.7% agree.
  • "As the USSR moves toward a market economy. a rapid and total reform (i.e., "going cold turkey") would result in a better outcome than a slow transition" 57.6% agree.
  • "A minimum wage increases unemployment among young and unskilled workers" 78.9% agree.
  • "An economy in short-run equilibrium at a real GNP below potential GNP has a self-correcting mechanism that will eventually return it to potential GNP" 50.8% agree.
  • "Changes in aggregate demand affect real GNP in the short run but not in the long run" 52.8% agree.
  • "Lower marginal income tax rates reduce leisure and increase work effort" 55.4% agree. (Alston et al., "is there a global economic consensus?" AEA Papers and Proceedings, 1992)

[Jan 13, 2016] Three Ways to Help the Working Class

Notable quotes:
"... Yes. The ratio of population to jobs needs to change dramatically. Bust out of the old cycle where the ratio thru out the cycle remains bad. Yes even at the peak of employment ! We need a far higher sustained rate of spending on domestically produced goods and services ..."
"... One problem with MMTers is they talk about very common ideas, like deficit financed spending, and pretend like they just invented something radically new, while completely failing to acknowledge or address the rest of the conversation that others have been having for years. ..."
"... Oh no! Whatever you do, cried Brer Rabbit, Dont throw me into the briar patch! ..."
"... ...So long as business interests dominate the political process, it will be hard to reverse the trend toward increasing inequality. ..."
"... Mark and most of his ilk support an open door for corporations to import smart, hard working and desperate workers from around the world...impact of that at the margins for wages(along with many other things) have been a disaster for the bottom 80% over the past 30 years. ..."
economistsview.typepad.com
I have a new column:
Three Ways to Help the Working Class : ... In graduate school, I was once told that "people don't have marginal products, jobs do." What does this mean? ...

I wish I would have connected the last part to the Supreme Court case on public unions.

RGC :

"If you took 100 dogs and you buried 95 bones in a field and you told the dogs their job was to go out and find a bone, what's the very best case scenario? The best you can possibly hope for is that 95 dogs come back with bones. Five dogs can't get bones. More likely, some dogs will get lucky; they'll stumble across a few extras. Some may have better skills; they'll find three or four. So, the number of dogs that come back without bones may be ten or fifteen.

(c. 9:38) "The conventional economist would gather the dogs together, the ones that had no bones, and train them to sniff out bones more effectively. Then they would send those hundred dogs back out into the field and tell them to go come back with a bone. And, again, the best you can get is 95 dogs with bones. What's wrong is that there aren't enough bones. There's nothing wrong with the dogs. The bones are the jobs. There's nothing wrong with the unemployed. There simply aren't enough jobs.

- Stephanie Kelton at the Summit on Modern Money Theory in Rimini, Italy. She is Creator and Editor of New Economic Perspectives. Her research expertise is in Federal Reserve operations, fiscal policy, social security, healthcare, international finance, and employment policy.

PPaine -> RGC...
Yes. The ratio of population to jobs needs to change dramatically. Bust out of the old cycle where the ratio thru out the cycle remains bad. Yes even at the peak of employment ! We need a far higher sustained rate of spending on domestically produced goods and services
sanjait -> RGC...
The very conventional new Keynesian response to a shortfall in demand is expansionary demand management policies.

One problem with MMTers is they talk about very common ideas, like deficit financed spending, and pretend like they just invented something radically new, while completely failing to acknowledge or address the rest of the conversation that others have been having for years.

RGC -> sanjait...
It's cute the way you make obviously ignorant assertions with such apparent confidence.
PPaine -> RGC...
Don't be too harsh. He very often makes good points. Why he's so hard on MMTers escapes me

Has he read kalecki Lerner and Vickrey ?
The young James Meade
The young Lawrence Klein

The Post war macro left
These are not MMTers

anne -> PPaine ...
http://www.nytimes.com/2013/10/22/business/economy/lawrence-r-klein-economist-who-forecast-global-trends-dies-at-93.html

October 21, 2013

Lawrence R. Klein, Economic Theorist
By GLENN RIFKIN

Lawrence R. Klein, who predicted America's economic boom after World War II and was awarded the 1980 Nobel in economic science for developing statistical models that are used to analyze and predict global economic trends, died on Sunday at his home in Gladwyne, Pa. He was 93.

His daughter Hannah Klein confirmed the death.

As World War II was ending, Professor Klein, widely regarded as a brilliant theorist, disputed the conventional wisdom that the postwar period would drive the American economy back into a long depression.

Using his econometric models based on mathematical equations, he predicted correctly that the pent-up demand for consumer goods and housing after the war, coupled with the purchasing power of the returning soldiers, would result not in economic crisis but in a surge in spending and a flourishing economy.

Though he often testified before federal bodies and served as an economic adviser to Jimmy Carter during his 1976 presidential campaign, Professor Klein chose to remain in academia - he taught economics at the University of Pennsylvania for 33 years - and rejected an offer to join the Carter administration.

"I am just an academic giving advice," he told People magazine in 1976. "If you are a technician and are asked for help, it is a social obligation of citizenship to give it."

Professor Klein's use of vast survey data to build statistical economic models for the United States and several other countries has been adopted by economists around the world. "Few, if any, research workers in the empirical field of economic science have had so many successors and such a large impact as Lawrence Klein," the Nobel committee wrote in awarding him the Nobel Memorial Prize in Economic Science....

anne -> PPaine ...
Where is a reference? Repeated name-dropping, with no references is widly inconsiderate. Since you use the names repeatedly, why not just have a set of references to put down?

What should a person read of Lawrence Klein?

anne -> PPaine ...
http://mrzine.monthlyreview.org/2010/kalecki220510.html

1942

Political Aspects of Full Employment
By Michal Kalecki

http://works.bepress.com/cgi/viewcontent.cgi?article=1027&context=timothy_canova

March, 1997

The Macroeconomics of William Vickrey
By Timothy A. Canova

http://crookedtimber.org/2015/12/17/piketty-meade-and-predistribution/

December 17, 2015

Piketty, Meade and Predistribution
By MARTIN O'NEILL

anne -> PPaine ...
http://community.middlebury.edu/~colander/books/map.html

1980

MAP: A Market Anti-Inflation Plan
By David Colander and Abba Lerner

Preface

This is a small book about a big topic. This is not the usual book on inflation, simplified- or oversimplified- to make accepted doctrines intelligible to the layman. It presents a new plan- MAP (Market Anti-inflation Plan)- that makes it possible to succeed in curing our inflation. The ideas in it are not easily absorbed. They form a radical new framework- a new way of looking at inflation, and indeed at all macroeconomics, which is at the same time only a synthesis of many divergent old trains of thought. As Albert Einstein said, "Ideas should be expressed as simply as possible, but not more so." We think we have made the book intelligible to nonspecialists, even though its ideas are challenging for all readers, and perhaps even more so for advanced economists.

We approach inflation as an economic problem, but we make allowances for political realities in designing MAP. Although we believe MAP should be adopted in some form, the book is not written from an advocatory position. We try to consider all arguments, both pro and con, and do not attempt to minimize potential difficulties.

The methodology is realytic - an unusual word that indicates a contrast with analytic. This means that we are primarily concerned with solving real problems. We believe that the book also contributes importantly to extending theoretical understanding, but it does this only where necessary to solve the problem at hand. *

* http://www.britannica.com/EBchecked/topic/1085393/Abba-P-Lerner#ref849102

Sandwichman -> RGC...
Ah-ha the lump of bones fallacy! Dogs looking for bones will create a supply of bones as a consequence of their demand for bones.

Dog gets no bone.
Dog starves.
Vultures (capitalists) eat meat off dead dog.
Bones!

anne :
http://www.nytimes.com/2016/01/12/us/politics/at-supreme-court-public-unions-face-possible-major-setback.html

January 11, 2016

Supreme Court Seems Poised to Deal Unions a Major Setback
By ADAM LIPTAK

WASHINGTON - The Supreme Court seemed poised on Monday to deliver a severe blow to organized labor.

In a closely watched case brought by 10 California teachers, the court's conservative majority seemed ready to say that forcing public workers to support unions they have declined to join violates the First Amendment.

A ruling in the teachers' favor would affect millions of government workers and culminate a political and legal campaign by a group of prominent conservative foundations aimed at weakening public-sector unions. Those unions stand to lose fees from both workers who object to the positions the unions take and those who simply choose not to join while benefiting from the unions' efforts on their behalf.

Under California law, public employees who choose not to join unions must pay a "fair share service fee," also known as an "agency fee," typically equivalent to members' dues. The fees, the law says, are meant to pay for collective bargaining activities, including "the cost of lobbying activities." More than 20 states have similar laws.

Government workers who are not members of unions have long been able to obtain refunds for the political activities of unions like campaign spending. Monday's case, Friedrichs v. California Teachers Association, No. 14-915, asks whether such workers must continue to pay for any union activities, including negotiating for better wages and benefits. A majority of the justices seemed inclined to say no.

Collective bargaining, Justice Anthony M. Kennedy said, is inherently political when the government is the employer. "Many critical points are matters of public concern," he said, mentioning issues like tenure, merit pay, promotions and classroom size.

The best hope for a victory for the unions had rested with Justice Antonin Scalia, who has written and said things sympathetic to their position. But he was consistently hostile on Monday.

"The problem is that everything that is collectively bargained with the government is within the political sphere, almost by definition," he said.

The court's four liberal members were on the defensive, asking whether there was good reason to overturn a 1977 decision by the court that allowed the fees....

anne -> anne...
http://www.nytimes.com/2016/01/09/us/politics/union-fees-friedrichs-v-california-teachers-association.html

January 8, 2016

Mandatory Union Fees Getting Hard Look by Supreme Court
By ADAM LIPTAK

The justices have already voiced skepticism about making people give money to public unions. They may now be ready to rule that it's unconstitutional.

PPaine -> anne...
The unins have no choice but to attack on all fronts

Public sector insulation from savage attacks ended long ago
This is just a after dinner beltch by the union eaters

Peter K. :
One way to increase worker bargaining power is to employ aggressive macro (fiscal, monetary, currency/trade) policy so that labor markets are tight and businesses are fighting over workers.

In the late 90s, labor shared in productivity gains as unemployment fell below 4 percent. This ended with the tech stock bubble which morphed into the housing bubble.

As DeLong recently wrote:

"What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities. And if those prove inconsistent with full recovery, then we need massive government spending on infrastructure and other investments financed by money printing until full employment is reattained."

It could be that achieving aggressive macro policy is as difficult politically as making the environment more favorable towards unions.

If we look at the post-war social democratic years, both helped raise living standards. Also the financial system was much smaller and much more regulated.

Peter K. -> Peter K....
http://www.huffingtonpost.com/brad-delong/global-economic-depression_b_8924596.html?1452263364

DeLong's quote

Peter K. -> Peter K....
Other ideas include work-sharing during downturns, and shorter hours.
Sandwichman -> Peter K....
"Oh no! Whatever you do," cried Brer Rabbit, "Don't throw me into the briar patch!"
pgl :
Point #2: "We also need to do a better job of providing the educational resources people need to reach their full potential."

I can see conservative economists echoing this but what specifically do they want policy to do to make this happen? More Pell Grants No - they want to cut that kind of support. Now Greg Mankiw will tell you that you will get a great education if you manage to get into Harvard and pay $300 for his textbook!

mulp -> pgl...
If getting a Harvard PhD for every worker means that the California farm worker cutting broccoli and lettuce, or changing bed pans for the bedridden in nursing homes, gets paid $120,000 per year, then I'm all for eliminating poverty by education.

My guess is education is not the path to eliminating poverty.

If you think education is the solution, explain why it takes a college degree to pay farm workers, home care workers, child care workers, cleaning people who scrub toilet, middle class wages, instead of simply paying them middle class wages right now.

RC AKA Darryl, Ron :
"...So long as business interests dominate the political process, it will be hard to reverse the trend toward increasing inequality."

[Actually it is the interest of management and the capital owning class that are dominating the political process. Businesses would do just fine if wages were higher, rent seeking - not so much.]

Peter K. :
https://www.jacobinmag.com/2016/01/yanis-varoufakis-interview-jeremy-corbyn-greece-eurozone-tsipras/

The Man Who Knew Too Much

An illustrated interview with former Greek finance minister Yanis Varoufakis.

g :
Mark and most of his ilk support an open door for corporations to import smart, hard working and desperate workers from around the world...impact of that at the margins for wages(along with many other things) have been a disaster for the bottom 80% over the past 30 years.
PPaine -> Paine...
Even the great dani rodick and joe Stigilitz could push tis harder
But they are one worlders

An honorable club but... Perhaps we need bordered areas to heal themselves first with national policies of true full employment and balance trade forex

Denis Drew :
That's right ... You cannot make the retail clerk any more productive. That's talking about the people I care about: bus drivers (taxi drivers -- me :-]), home carers, janitors, etc. But, you can make the economy they inhabit more productive -- and then the economy can pay them more (not less every year!): why barbers in France get paid more than barbers in Poland (classic example).

US per capita income in 1968, $15,000. In 2016, $30,000.

Minimum wage nearly $4 an hour below what it was in 1968 (adjusted). Ditto for the price of US labor across the mid-to-lower board.

US mid-to-low labor price so extraordinarily low that half (HALF! -- 100,000!) of Chicago's gang age, minority males would rather join a street gang. Then there's my gang, Chicago's old (mostly retired) American born taxi drivers. Wouldn't get us into that job today for $500, if lucky, for 60 grueling hours.
http://www.cbsnews.com/news/gang-wars-at-the-root-of-chicagos-high-murder-rate/

The core American trouble isn't wages not keeping up with productivity per se (though that parallels); the core labor sickness is wages not even remotely approaching what the consumer (not the boss) might be very willing to pay.

We do not need to attract businesses that provide good jobs -- the jobs cannot be good if the pay is miserly. High wage opportunities don't happen -- they are made (ask Jimmy Hoffa).

Educational resources are not needed to help retail clerks reach their full potential. Good pay for retail clerks is needed to help Detroit's schools reach their full potential. Nationwide: poverty area schools don't work because students (and teachers!) don't feel it worth making the effort -- given the job market doesn't promise anything remunerative enough to strive for when it's time for them to go to work.
http://www.amazon.com/gp/product/B00332EXDM/ref=dp-kindle-redirect?ie=UTF8&btkr=1

"I believe this is mainly due to differences in bargaining power." Which is mainly due to absurdly unenforceable labor laws in this country which -- uniquely in all markets -- allows one side in the labor market to bully the other side out of being able to meaningfully bargain. Simple enough solution: make union busting a felony (like every other kind of market warping -- try to take a movie in the movies and telling them you were only kidding).

The labor laws enabling collective bargaining have long been in place; the need for collective barraging presumably settled. So when are progressive states going to begin -- one state at a time; forget Congress -- to make these laws enforceable? Federal preemption means individual states cannot subtract from national law, but states may add. In Maryland for one, Democrats have a 33-17 edge in the State Senate and a 91-50 edge in the House. WA, OR, CA, IL, NY, anybody listening?

IS ANYBODY, ANYWHERE LISTENING?! Retail clerks (and their hungry families) desperately want to know.

PPaine -> PPaine ...
Criminalize anti union activity
mulp -> Denis Drew ...
Conservatives want lower gdp growth.

Or else they believe in free lunch economics:

Step 1. Cut wages to increase profits
Step 2. Produce more and price it twice as high
Step 3. Demand government allow workers to borrow at high interest rates to buy twice as much as before their wages were cut in half
Step 4. Blame government, and especially Obama when the math does not work out.

If you want faster gdp growth, you must pay workers, who are after all 99% of the consumers, more and increase their pay faster.

Economies are zero sum.

It is possible to time shift, say by exporting more than imported and taking the difference and saving it by buying debt, or stored labor, in other countries, but at some point, the process is reversed. For the US, savings has flowed into the US blocking exports and increasing imports. At some point, that will need to reverse. Someone will need to work more and consume less. That will need to be the 1% because for decades, most US workers have worked more and consumed less, unless they got to borrow and consume so they will need to work more and consume less.

Unless there is a massive redistribution of wealth, either war, or bankruptcy. Trying to tax wealth to redistribute will only destroy the wealth. After all, 99% of the wealth in the US was not built by labor, but inflated into existence by pump and dump asset churn or by high rents inflating decaying scarce assets in price.

[Jan 10, 2016] Comprehensive financial planners now do a lot of the work that family attorneys did in generations past

www.nakedcapitalism.com

Jim in SC , January 9, 2016 at 8:57 pm

I think that comprehensive financial planners now do a lot of the work that family attorneys did in generations past. This is partly because the sort of person who goes to law school now is much more intellectual -- and thus often a little more introverted and socially inept–than in years past. Watergate caused that, I believe. All of a sudden everybody was interested in the mechanism of the law. Fifty years ago a right-of-way agreement from the local utility was three sentences. Now it's five pages single spaced, in some English derived technical gibberish.

Anyway, you really need the professional when somebody dies. That professional is far more likely to be the financial planner than the lawyer these days, in part because the financial planner is paid by assets under management, rather than hundreds of dollars per hour, so the financial planner would be paid anyway. I think it is rare to see attorneys designated as executors of estates these days. They charge six percent by statute, and that's too much for many people's blood. God forbid that one should be appointed to manage a trust with multiple beneficiaries. They'll stretch it out thirty years.

[Jan 09, 2016] For the Wealthiest, a Private Tax System That Saves Them Billions

mobile.nytimes.com
Neretva'43 | Jan 9, 2016 10:33:05 AM | 77

Re: dahoit | Jan 9, 2016 9:51:32 AM | 74

here is an important article for you. While the whole article is astonishing I'll post just one small passage. If someone can not figure out who the real (not perceived) enemy than s/he is lost cause.

"For the Wealthiest, a Private Tax System That Saves Them Billions"
http://mobile.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html?_r=3

"We do have two different tax systems, one for normal wage-earners and another for those who can afford sophisticated tax advice," said Victor Fleischer, a law professor at the University of San Diego who studies the intersection of tax policy and inequality. "At the very top of the income distribution, the effective rate of tax goes down, contrary to the principles of a progressive income tax system."

[Jan 09, 2016] Intellectual property and the decline of the U.S. labor share

Equitable Growth

The paper -by Dongya Koh of the University of Arkansas, Raul Santaeulalia-Llopis of the Washington University in St. Louis, and Yu Zheng of the City University of Hong Kong-takes advantage of newly updated GDP data from the U.S. Bureau of Economic Analysis. While the Bureau is constantly releasing new data on economic growth, it also revises previous data. Sometimes those revisions show an increase in total U.S. economic output, and sometimes the revisions show a change in the composition of that output. It's the latter kind of revision that's important in this case.

In 2013, the Bureau of Economic Analysis updated its treatment of a variety of issues, including how it treats research and development spending. The BEA previously treated R&D spending as a business expense but, as the BEA realized, it makes more sense to think of spending that could potentially boost a firm's output as a capital investment. As the authors of the paper show, counting investments in intellectual property as, well, investment significantly increases the amount of investment showing up in the data. According to their calculations, intellectual property products have increased from 8 percent of U.S. investment in 1947 to 26 percent in 2013.

Accounting for this kind of capital investment means that the decline in the U.S. labor share starts much earlier than previously thought. According to the paper, the decline starts in 1947, which would mean the labor share was declining throughout the period it was famously stated to be constant. But not only does the decline start earlier than previously thought-it's also much larger. It's actually twice as large. And the increase in intellectual property products explains the entirety of the decline.

[Jan 09, 2016] That's rich! Why so many wealthy Americans think they're middle class

Jan 09, 2016 | Salon.com

Earlier this year, for example, Hillary Clinton made headlines when, in response to a question about her personal fortune, she claimed her family was "dead broke" when they left the White House. That statement followed New York Gov. Andrew Cuomo's top aide casting those making $500,000 a year as merely upper middle class.

According to IRS data, 99 percent of American households make less than $388,000 a year, and 95 percent make less than $167,000 a year. The true middle in terms of income - that is, the cutoff to be in the top 50 percent of earners - is roughly $35,000 a year.

While Lew claims his private-sector compensation was not "in the stratosphere," the data suggest otherwise.

According to New York University records, Lew was usually paid between $700,000 and $800,000 a year as the school's vice president, while also receiving a $440,000 mortgage subsidy. Lew also earned $300,000 a year from Citigroup, with a "guaranteed incentive and retention award of not less than $1 million," according to an employment agreement obtained by Businessweek.

[Jan 07, 2016] 5 of the Worst Examples of Biased and Distorted Media Coverage of Education in 2015

Notable quotes:
"... Sure the myth of meritocracy and American exceptionalism is all over public education, however, Im not sure this is the fault of teachers themselves. Public curriculum is now mostly controlled from without, and teachers are largely constrained as to what they can teach, when they can teach it, and how. The constant battery of tests really limits the freedom teachers have in offering a variety of materials, because if those kids dont produce exactly what the test maker is looking for, it could be their job on the line. You cant teach bell hooks, if you dont have a teaching job to begin with. ..."
"... Too true! I keep returning to Paul Goodmans classic screed, Compulsory Miseducation . 1964. Crapification has been with us a long time. We are now harvesting its rotten fruits. ..."
"... I only wish American teachers had anywhere near as much agency as you think they do! Are you aware who controls the curriculum, and how politicized this is? While I taught in the nations largest public school system, it was under mayoral control. His education chancellors were mostly non-educators (a lawyer, and, most briefly and notoriously, a publisher), and hired private contractors and spent millions of public money on charters. ..."
"... The curriculum has been hijacked by the Common Core, which dictates which materials can be covered, and how it can be covered. ..."
December 31, 2015 | nakedcapitalism.com

kings , December 31, 2015 at 6:19 am

today's Republicans and defending teachers(and firefighters and police) to the very last stand. Yes, public education is one of the foundations of our country, and should never be 'privatized'(um, stolen) to a political bidder. But also, teachers(and f's and p's) generally make outstanding salaries, paid for by property taxes, and have their retirement funded, and are allowed to strike to add more whenever they like. Oh, then they can retire after 20-30 years and still receive significant pension benefits.

The 'everyone pays' for the select few is a problem in this country, and is never discussed in any media that I see.

Teachers' personal money is the most common source of funding for classroom projects. On average, teachers spent a total of $398 on school supplies in 2009-2010 and an additional $538 on educational materials." The total expended that year by the nation's 3.7 million teachers? A whopping $3.5 billion.

And it's not just teachers. According to the Summer 2012 issue of NEA Today, the newsmagazine of the National Education Association, 66 percent of education support professionals – a category that includes bus drivers, custodians, lunchroom staff, secretaries, security guards and skilled trades people – dig into their pockets to help kids in need. Their expenditures? An average of $216 per employee per year."
http://www.truth-out.org/news/item/12504-public-school-teachers-spend-billions-of-their-own-money-on-student-needs

(sigh) too often i hear people complain about property taxes & schools…now dayz i suggest we all stop paying the tax and enjoy the short life span the bored & uneducated kids will rein on us!

jgordon , December 31, 2015 at 7:03 am

I have a general antipathy towards teachers; no matter how well intentioned they are, ultimately they're still responsible for indoctrinating the world-view and cultural myths required for children to become good corporate state consumers/employees. No matter how progressive and enlightened the curriculum, nor how lavish the facilities and small the class sizes, Howard Zinn won't be taught.

I won't say that all education is bad–but compared to what passes for education now in America, I believe that our students and society would be better off if we had no education at all, since what we have now is leading society and humanity off a cliff. Therefore the only real problem I have with breaking up teachers unions and closing schools is that they'll probably be replaced with something even more corporate and soul-destroying.

Uahsenaa , December 31, 2015 at 8:30 am

I think you're blaming the wrong people for this. Sure the myth of meritocracy and American exceptionalism is all over public education, however, I'm not sure this is the fault of teachers themselves. Public curriculum is now mostly controlled from without, and teachers are largely constrained as to what they can teach, when they can teach it, and how. The constant battery of tests really limits the freedom teachers have in offering a variety of materials, because if those kids don't produce exactly what the test maker is looking for, it could be their job on the line. You can't teach bell hooks, if you don't have a teaching job to begin with.

jgordon , December 31, 2015 at 11:19 am

teachers are largely constrained as to what they can teach

Well that's exactly my point. Teachers are ultimately servants to the corporate state. They have little to no free will themselves. They will train their students to be model employees and insatiable consumers–who love America because patriotism, or they will be fired.

I'm not blaming them for their lot. Teaching is certainly a crappy, and unappreciated job in this society–and there is something admirable about someone who chooses to wear such a hair shirt, even if there is no point to it. I'm saying that the whole apparatus of public education in America should be radically redone, and until it's redone this whole institutional (public and private) education debacle should be suspended immediately. The cultural/social monoculture it's creating is a genuine danger to humanity.

Torsten , December 31, 2015 at 3:57 pm

Too true! I keep returning to Paul Goodman's classic screed, Compulsory Miseducation . 1964. Crapification has been with us a long time. We are now harvesting its rotten fruits.

All the Trump supporters (and let us not forget, e.g., Spiro Agnew, superhero vanquisher of the nattering nabobs, and his minions), all those B and C and D and F students who now can vote away the pensions of the teachers who gave the voters those grades. .

There's lots of revenge voting going on.

Inverness , December 31, 2015 at 11:29 am

Jgordon, your comment begs a lot of questions. I'll try to address them. As a former New York City teacher, I'd like to share my views.

I only wish American teachers had anywhere near as much agency as you think they do! Are you aware who controls the curriculum, and how politicized this is? While I taught in the nation's largest public school system, it was under mayoral control. His education chancellors were mostly non-educators (a lawyer, and, most briefly and notoriously, a publisher), and hired private contractors and spent millions of public money on charters.

Since you mentioned it, what about what is taught, and who controls that? The curriculum has been hijacked by the Common Core, which dictates which materials can be covered, and how it can be covered. This was developed by many non-educators who don't have a clue about how children and adolescents learn, and this is reflected by the abysmally low test scores, even in regions where there were no problems before. Even before the Common Core, you have the New York States Regents exams, which trivializes history, making it impossible to teach properly, unless you want to risk your job (remember, low test scores, bad ratings).

Furthermore, you mention that teachers don't teach Howard Zinn. Well, I'm shocked at how many enlightened, left-leaning teachers I met in the States, considering the huge propaganda campaign waged against progressive thinking, that most certainly did not end with the McCarthy era in the 1950's! So you're working in a nation which has actively tried to target, and even destroy, the careers of people left-leaning or sympathetic to "enemies of the State." I always felt like I was one unpopular move away from becoming a New York Post headline, for daring to challenge the mainstream perception of Hugo Chavez and for discussing why many consider Bush a war criminal. I have had to deal with complaints from principals and parents. I soldiered on for years, but after awhile, your health suffers.

Also, keep in mind that history teachers in New York must somehow manage to teach a ridiculously overloaded curriculum. They cannot choose to stop everything and really teach in a more meaningful way, because they are judged by their students' test scores. They mustn't anger their administrators and superintendents, who are scared of politicians and parents. I would love to have had more freedom to teach the way I wanted to, most of the time. To cover a worthwhile secondary source like Zinn means having the time and resources to do that. Also, it means that you will be supported by your administrators and parents. This is extremely difficult, even in a state like New York, which is not nearly as open-minded as it claims to be.

Covering historians like Zinn would also be easier if we had some control over our classroom materials. Who do chooses and writes the textbooks? Many textbook authors must please Texas, the largest state. This does not exactly encourage, shall we say, the most progressive thinking. Teachers often have to fight to just get their photocopies done, and straight lecturing is forbidden. So they have to rely on the texts their buildings provide them. Teachers also get a bit paranoid, since anything - ANYTHING can get them smeared in papers like the New York Post and the The New York Daily News. So I agree that Zinn's views should be a part of the curriculum, but much of TPTB aren't exactly on my side.

You also need to understand that if the US doesn't produce mostly progressive economists, university presidents, politicians, lawyers and citizens…why would teachers be so different? The US, with a mainstream press that promotes Hillary Clinton as the ideal presidential candidate, is not exactly a hotbed of innovative thinking. Teachers aren't magical people, despite what Hollywood tells us, which features teachers that can somehow transform poor, hungry students into academic stars, fueled by charisma, sugary snacks, and iron will alone.

Thank you for bearing with me this far (if you that's the case). I know so many talented teachers in New York who seemed to work themselves so hard, so it kind of kills me to read these kinds of blanket statements. Forget Hollywood's hackneyed portrayal of teachers. For me, the real miracle is that after all of the hatred, union-busting, conservative propaganda, deprofessionalisation, …the real miracle is that there still are some fantastic teachers in the field.

[Jan 06, 2016] Another Slow Year for the Global Economy

Notable quotes:
"... Sometimes … demand is restricted by the fact that nobody has any money in their pocket. ..."
"... the only takeaway is that most economists are nothing more than rancid witch doctors doing backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged. ..."
"... Modern neoliberal economics is just an ideology not a science. It exists to justify the current distribution of wealth with pseudoscientific nonsense written in abstruse mathematical language. Milton Friedman was to economics what T.D. Lysenko was to Soviet biology. Pseudoscience in service to the ruling class. ..."
"... [Economists are] clueless about the real world because their fat paycheck magically appears in their bank account, while producing nothing. ..."
Jan 06, 2016 | naked capitalism

By Ashoka Mody, Professor of Economics at Princeton. Originally published at Project Syndicate

For starters, world trade is growing at an anemic annual rate of 2%, compared to 8% from 2003 to 2007. Whereas trade growth during those heady years far exceeded that of world GDP, which averaged 4.5%, lately, trade and GDP growth rates have been about the same. Even if GDP growth outstrips growth in trade this year, it will likely amount to no more than 2.7%.

The question is why. According to Christina and David Romer of the University of California, Berkeley, the aftershocks of modern financial crises – that is, since World War II – fade after 2-3 years . The Harvard economists Carmen Reinhart and Kenneth Rogoff say that it takes five years for a country to dig itself out of a financial crisis. And, indeed, the financial dislocations of 2007-2008 have largely receded. So what accounts for the sluggish economic recovery?

One popular explanation lies in the fuzzy notion of "secular stagnation": long-term depressed demand for goods and services is undermining incentives to invest and hire. But demand would remain weak only if people lacked confidence in the future. The only logical explanation for this enduring lack of confidence, as Northwestern University's Robert Gordon has painstakingly documented and argued , is slow productivity growth.

Before the crisis – and especially from 2003 to 2007 – slow productivity growth was being obscured by an illusory sense of prosperity in much of the world. In some countries – notably, the United States, Spain, and Ireland – rising real-estate prices, speculative construction, and financial risk-taking were mutually reinforcing. At the same time, countries were amplifying one another's growth through trade.

Central to the global boom was China, the rising giant that flooded the world with cheap exports, putting a lid on global inflation. Equally important, China imported a huge volume of commodities, thereby bolstering many African and Latin American economies, and purchased German cars and machines, enabling Europe's largest economy to keep its regional supply chains humming.

This dynamic reversed around March 2008, when the US rescued its fifth-largest investment bank, Bear Sterns, from collapse. With the eurozone banks also deeply implicated in the subprime mortgage mess and desperately short of US dollars, America and much of Europe began a remorseless slide into recession. Whereas in the boom years, world trade had spread the bounty, it was now spreading the malaise. As each country's GDP growth slowed, so did its imports, causing its trading partners' growth to slow as well.

The US economy began to emerge from its recession in the second half of 2009, thanks largely to aggressive monetary policy and steps to stabilize the financial system. Eurozone policymakers, by contrast, rejected monetary stimulus and implemented fiscal austerity measures , while ignoring the deepening distress of their banks. The eurozone thus pushed the world into a second global recession.

Just when that recession seemed to have run its course, emerging economies began to unravel. For years, observers had been touting the governance and growth-enhancing reforms that these countries' leaders had supposedly introduced. In October 2012, the IMF celebrated emerging economies' "resilience." As if on cue, that facade began to crumble, revealing an inconvenient truth: factors like high commodity prices and massive capital inflows had been concealing serious economic weaknesses, while legitimizing a culture of garish inequality and rampant corruption .

These problems are now being compounded by the growth slowdown in China, the fulcrum of global trade. And the worst is yet to come. China's huge industrial overcapacity and property glut needs to be wound down; the hubris driving its global acquisitions must be reined in; and its corruption networks have to be dismantled.

In short, the factors that dragged down the global economy in 2015 will persist – and in some cases even intensify – in the new year. Emerging economies will remain weak. The eurozone, having enjoyed a temporary reprieve from austerity, will be constrained by listless global trade. Rising interest rates on corporate bonds portend slower growth in the US. China's collapsing asset values could trigger financial turbulence. And policymakers are adrift, with little political leverage to stem these trends.

The IMF should stop forecasting renewed growth and issue a warning that the global economy will remain weak and vulnerable unless world leaders act energetically to spur innovation and growth. Such an effort is long overdue.


ArkansasAngie , January 6, 2016 at 6:17 am

"But demand would remain weak only if people lacked confidence in the future"

Sometimes … demand is restricted by the fact that nobody has any money in their pocket.


James Levy, January 6, 2016 at 6:45 am

Is he kidding:

The only logical explanation for this enduring lack of confidence, as Northwestern University's Robert Gordon has painstakingly documented and argued, is slow productivity growth.

Real wages for a hefty percentage of the population haven't risen since 1971. Most people are treading water or losing ground. Over 90% of the modest gains since the 2008 crash have gone to 1% or less of the population. But the problem is productivity! And this guy has a tenured job at Princeton. Standards for employment there must include smug self-assurance, ideological blinders, and the inability to assimilate any facts not cogent to people richer than you are.


Jim Haygood, January 6, 2016 at 11:37 am

If Princeton's most illustrious alumnus can finally make some serious loot in the private sector, soon the author will be toiling at the Bernanke School of Economics.

Skippy, January 6, 2016 at 8:18 am

Productivity is the cocaine of the labour pool, like the old cocaine ad of the 80s in Calif [during the epidemic].

White square room about 6M X 6M, top shelf sale executive sort doing laps like a con and the verse goes like…. I do cocaine because I'm more productive… so I make more money… so I can do more cocaine… over and over and with each litany increases his speed until a blur….

Skippy…. the end is a wrung out wretch sitting on the step of some low socioeconomic apt talking about losing, wife, kids, job, everything…. w burnt out dopamine receptors as a lullaby till morte'

efschumacher, January 6, 2016 at 8:50 am

Here in the US:it's not like there's a shortage of work to be done to fix the massively inappropriate national infrastructure – to make it human sustainable – I mean for the 'little people'. There is of course the perennial lack of congressional vision and long term planning. There lies a huge root of the problem.

RabidGandhi, January 6, 2016 at 9:12 am

Is this meant as a good cop/bad cop contrast piece with the Ann Pettifor post?

Here, I gave up any hope of Mody being at all earnest when he cited Rogoff and Reinhart (!!!). Then the rest of the article completely self-destructs: weak productivity and insufficient innovation are the issue?

When combined with yesterday's NYT article on inequality, the only takeaway is that most economists are nothing more than rancid witch doctors doing backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged.

Stephen Gardner, January 6, 2016 at 9:33 am

Modern neoliberal economics is just an ideology not a science. It exists to justify the current distribution of wealth with pseudoscientific nonsense written in abstruse mathematical language. Milton Friedman was to economics what T.D. Lysenko was to Soviet biology. Pseudoscience in service to the ruling class.

cnchal, January 6, 2016 at 9:43 am

. . . the only takeaway is that most economists are nothing more than rancid witch doctors doing backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged.

They are the useless eaters. [Economists are] clueless about the real world because their fat paycheck magically appears in their bank account, while producing nothing.

Here is Mody

The US economy began to emerge from its recession in the second half of 2009, thanks largely to aggressive monetary policy and steps to stabilize the financial system.

Totally clueless.

susan the other, January 6, 2016 at 2:02 pm

"Lack of confidence" – let me count the ways. This is a phrase to match every vacuous denial of human economic chaos ever pontificated. Yuck.

[Jan 05, 2016] Citi turns 'underweight' on US stocks

The S&P 500, ended the year down 0.73 percent after three straight years of double digit gains.
Notable quotes:
"... Alain Bokobza, head of global asset allocation at Societe Generale, told CNBC last week that he was expecting the S P 500 to absorb the Fed rate hikes this year and finish the year flat at around 2,050 points. ..."
finance.yahoo.com

Citi strategists led Robert Buckland highlighted the potential for weaker earnings per share (EPS) momentum in the U.S., in a note released on Tuesday. EPS is an important metric used by analysts and is used an indicator of a company's profitability.

"Fading EPS momentum and rising Fed funds mean that, after six consecutive years of outperformance, we cut the U.S. to underweight," Citi said in the note.

... ... ...

David Kostin, chief U.S. equity strategist at Goldman Sachs, told CNBC in December that stock markets could be mostly flat in 2016. Meanwhile, Alain Bokobza, head of global asset allocation at Societe Generale, told CNBC last week that he was expecting the S&P 500 to absorb the Fed rate hikes this year and finish the year flat at around 2,050 points.

[Jan 05, 2016] A stock-market crash of 50%+ would not be a surprise - or the worst-case scenario

finance.yahoo.com

By many, many historically predictive valuation meassures, stocks are overvalued to the tune of 75%-100%.

In the past, when stocks have been this overvalued, they have often "corrected" by crashing (1929, 1987, 2000, 2007, for example) . They have also sometimes corrected by moving sideways and down for a long, long time (1901-1920, 1966-1982, for example).
... ... ...

Stocks are wildly overvalued on historically predictive measures

According to several historically valid measures, stocks are now more expensive than they have been at any time in the past 130 years, with the exception of 1929 and 2000 (and we know what happened in those years).

For example, the chart below is from Yale professor Robert Shiller. It shows the cyclically adjusted price-earnings ratio of the S&P 500 for the past 130 years.

As you can see, the current PE ratio of at least 26 is miles above the long-term average of 15. In fact, it is higher than at any point in the 20th century, with the exception of the months that preceded the two biggest stock-market crashes.

[Jan 04, 2016] Dollar Dominance Deconstructing the Myths and Untangling the Web

Notable quotes:
"... The US empire is one of Multi-National corporations and International Trade Deals. ..."
"... Im intrigued by that assertion, especially if this comes from a more libertarian perspective and an author who actually mentions NATO. Of course corporate welfare in various forms is a key part of what is happening, but the core issue is a literal military empire, not some vague commercial facsimile of one. ..."
"... The direct imperial threats include economic warfare, as displayed by the IMF and ECB. As demonstrated in Greece, Ukraine, and before Greece Ireland. ..."
"... By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed dramatically by comparison. Both the Carter administration and the Fed did everything in their power to control dollar devaluation, but it was clear by this time that without the assistance from foreign governments the dollar would not be able to survive . … Over the course of the next six years the dollar experienced a meteoric rise in value. ..."
Jan 04, 2016 | naked capitalism

washunate , January 4, 2016 at 10:43 am

The US empire is one of Multi-National corporations and International Trade Deals.

I'm intrigued by that assertion, especially if this comes from a more libertarian perspective and an author who actually mentions NATO. Of course corporate welfare in various forms is a key part of what is happening, but the core issue is a literal military empire, not some vague commercial facsimile of one. One of the most successful Big Lies in our domestic political discourse is to blame convenient corporate villains instead of the public officials who are responsible for decision-making and implementation.

This isn't the 1980s anymore. The global financial system (post Bretton Woods) collapsed somewhere there in the 1990s. Today, things are held together by direct imperial threats, not corporate board rooms.

Synoia , January 4, 2016 at 10:50 am

The direct imperial threats include economic warfare, as displayed by the IMF and ECB. As demonstrated in Greece, Ukraine, and before Greece Ireland.

Synoia , January 4, 2016 at 10:47 am

It is not dollar hegemony that rules the world, but the global financial system which gives the dollar its place of privilege.

Syllogism? What came first the chicken or the egg?

Where to begin – one could suggest the author read Chapter 1 of Wray's MMT and rewrite considering sector balances and fiat currencies, and present the different line of argument which would arise.

MyLessThanPrimeBeef , January 4, 2016 at 1:18 pm

Unless you entice, seduce, leave no other option for the workers but to borrow, at ever lower rates, thank God.

Then, you can export jobs overseas. Wait, that's how we have managed so far…that, and renting out rooms/beds/bathrooms in your apartment.

Left in Wisconsin , January 4, 2016 at 1:29 pm

"By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed dramatically by comparison. Both the Carter administration and the Fed did everything in their power to control dollar devaluation, but it was clear by this time that without the assistance from foreign governments the dollar would not be able to survive ." … "Over the course of the next six years the dollar experienced a meteoric rise in value."

Maybe not central to the main argument but I found this claim (in bold) implausible.

[Jan 03, 2016] Irving Berlin on Taxes

Notable quotes:
"... I am always struck by the difference between the oligarchs of today and those (a very small group) who ran the uk in the late 17 and 18 century. Proud, brutal but they taxed themselves as necessary to build effective institutions and instruments in the service of common goals ..."
"... in this culture we recognize the Midas touch as a positive good, rather than the curse the Greeks knew it to be. ..."
"... My feeling has always been that taxes are the price you pay to live in a civilized society. Conservatives are obviously opposed to that. ..."
"... An even more commercially successful writer, J. K. Rowling, has expressed similar enlightened views. There ought to be a hall of fame for such folks. ..."
"... To become a hedge fund billionaire you can have no heart and you can have no soul. You must be a ruthless predatory bastard with no concern for morality or justice. So it is not surprising that the question of whether you owe something to others doesnt really register with hedge fund billionaires. ..."
economistsview.typepad.com
Chris Dillow on our " narcisstocracy ":
Irving Berlin on taxes : The New York Times reports on how some of the US's richest men are dodging taxes. Compare this to the response of Irving Berlin when his lawyer offered him a tax shelter:
I want to pay taxes. I love this country.
He even wrote a song expressing this sentiment. He said: "I owe all my success to my adopted country." ...
He embodied -- knowingly so -- a point made by Herbert Simon, that we westerners owe our fortunes not so much to our own efforts but to the good luck of living in societies which enable us to prosper - which have peace, the rule of law and material and intellectual resources ...
Now, songwriting is pretty much as individualistic an activity as one can find; But even songwriters require a conducive environment such as musical traditions on which to draw and a marketplace for their work. Berlin knew this: 1930s Siberia had no equivalent of Tin Pan Alley or Hollywood.
If even songwriters owe their wealth to social capital, how much more true is this of hedge fund managers. They would be nothing without wealthy investors or large liquid financial markets: how many billionaire fund managers are there in Burkina Faso?
Which poses the question: why, then, don't hedge fund managers have the same attitude to paying tax as Irving Berlin? It could be that they are more motivated ... by personal greed. But there might be another reason..., they believe their wealth is the product of their own "talent" and so they are entitled to it... Others of us prefer to call it an example of one of the disfiguring diseases of our time - narcissism.
Perhaps there's another explanation, though. Maybe hedge fund billionaires are greater geniuses than Irving Berlin who have contributed more to human happiness. But how likely is this?

ilsm:

More of Berlin:

https://en.wikipedia.org/wiki/Stay_Down_Here_Where_You_Belong

Groucho Marx did that one on Dick Cavitt.

pgl:

"The New York Times reports on how some of the US's richest men are dodging taxes."

But Jay Bird just today declared corporations ARE paying their taxes. Really? There is no such thing as Base Erosion and Profit Shifting?

pgl -> Jay...

You need to get a life. Start with laying off the booze.

Roland:

I am always struck by the difference between the oligarchs of today and those (a very small group) who ran the uk in the late 17 and 18 century. Proud, brutal but they taxed themselves as necessary to build effective institutions and instruments in the service of common goals

EMichael:

Berlin realized that he did not build that.

Robert Marshall:

What is more likely is that songwriting and billionairing require very different character traits to reach the top. I wish I knew what it took to be a songwriter, but to be a billionaire, you have to think the right way to go about life is to try to get as much as you can for as little as you have to give up, and not even that if you can get out of it. And yet in this culture we recognize "the Midas touch" as a positive good, rather than the curse the Greeks knew it to be.

SomeCallMeTim:

Is it unseemly to infer that maybe these MOTUs hear the same dogwhistle symphony they fund? Or are they above that sort of thing, and just 'have a business to run'?

DrDick:

My feeling has always been that taxes are the price you pay to live in a civilized society. Conservatives are obviously opposed to that.

Jay -> DrDick...

You take the mortgage interest deduction?

Tax dodger!

DrDick -> Jay...

I rent.

DrDick -> DrDick...

And I take essentially nothing except the personal deduction.

Ken D :

An even more commercially successful writer, J. K. Rowling, has expressed similar enlightened views. There ought to be a hall of fame for such folks.

Benedict@Large -> Ken D ...

Why is everyone so concerned with diagnosis? We know that great piles of money in few hands leads to no good, and that is enough. Tax it away. Then let the formerly rich use their newly-freed time writing poems describing the beauty of skimming from other people's cash flows.

DeDude:

To become a hedge fund billionaire you can have no heart and you can have no soul. You must be a ruthless predatory bastard with no concern for morality or justice. So it is not surprising that the question of whether you "owe" something to others doesn't really register with hedge fund billionaires.

[Jan 01, 2016] Economics Joke Time

Notable quotes:
"... GDP. Great deposits of poo. ..."
"... [The financial crisis is worse than thought …] ..."
"... – Yes Prime Minister, A Real Partnership ..."
"... Economists: purveyors of fictions upon which the superstructure of organized robbery is raised. ..."
"... "Market Failure" is the name that economists who believe that the market cannot ever fail use when the market fails. ..."
"... "Economists put decimal points in their forecasts to show that they have a sense of humour" ..."
"... "Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else." ..."
December 30, 2015 | naked capitalism
Posted on by

... ... ...

The Standup Economist has a routine that has become a classic:

And of course, there are the economist variants of the lightbulb joke, originating in a 1994 Wharton Journal, as later recapped in Forbes:

Q: How many economists does it take to change a light bulb?

A1: None. The darkness will cause the light bulb to change by itself.

A2: None. If it really needed changing, market forces would have caused it to happen.

A3: None. If the government would just leave it alone, it would screw itself in.

A4: None. There is no need to change the light bulb. All the conditions for illumination are in place.

A5: None. Because, look! It's getting brighter! It's definitely getting brighter!!!

A6: None. They're all waiting for the unseen hand of the market to correct the lighting disequilibrium.

tony, December 30, 2015 at 6:12 am

Q: What do you call an economist that makes a prediction?

A: Wrong.

ben, December 30, 2015 at 3:28 pm

Two economists are walking on the street. They notice a pile of horseshit, and the older one says to the younger one: "I'll pay you twenty thousand if you eat that." The younger one ponders for a moment, then agrees and eats it. They walk a bit more and run into another pile of horse feces. So the younger one tells the elder: "I'll pay you twenty thousand if you eat that!". The older economist considers the offer and starts eating. After a while the younger economists stops and asks: "What was the point of this? We both ate a pile shit and neither of us got richer." The older one answers: "What are you talking about? We both produced and received twenty thousand worth in income and services."

GDP. Great deposits of poo.

Clive, December 31, 2015 at 5:41 am

"This economy is really terrible."

"How bad is the economy?"

"The economy is so bad, this year oysters are making fake pearls…"

"The economy is so bad, organised crime just laid off 10 judges…"

(and so on)


Paul Jonker-Hoffrén, December 30, 2015 at 7:27 am

"Knock Knock!"

"Who's there?"

"It's Return to Growth!"

Two years later…

"Knock Knock!"

"Who's there?"

"It's Return to Growth!"

And ad finitum…

Clive, December 30, 2015 at 6:21 am

"Knock Knock"

"Who's there?"

"Janet Yellen"

"Well there's no need to shout, I heard you knocking"

Joaquin Closet, December 30, 2015 at 7:42 am

The number of economists is the only thing that contradicts the Law of Supply and Demand.

craazyboy, December 30, 2015 at 9:00 am

Q: How many economists does it take to change a light bulb?

A: Three. A micro-economist to hold the ladder, a macro-economist to rotate the room, and a university economist to develop the math model and forecast how long it will take.

Ulysses, December 30, 2015 at 9:56 am

A mathematician, an accountant and an economist apply for the same job at an oil company.

The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer hard and says "Yes, four, exactly."

Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four – give or take ten percent, but on average, four."

Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?

Paul Tioxon, December 30, 2015 at 10:02 am

What do you call a cruise ship sinking with 500 PhD economists chained below deck?

A good start.

allan, December 30, 2015 at 10:03 am

Frederic Mishkin.

Yves Smith, December 30, 2015 at 4:32 pm

Oh, that is good!

Paul

An economist is someone who will tell you tomorrow why what they predicted yesterday didn't happen today.

An economist, a physicist, and an engineer are stranded on an island with a can of food, and no opener.

The engineer says, "Let's smash the can open with a rock and eat".
The physicist replies, "Naw, that's going to splatter the food all over the place. Let's light a fire, the expanding gases will force the can to pop open and presto: warm food!"
The economist says, "Bad idea: the can will explode and the food will be all over the place. Now… let's assume we have a can opener…."

Blue Meme

A physician, an engineer, and an economist were discussing who among them belonged to the oldest profession. The physician said, "Remember, on the sixth day God took a rib from Adam and fashioned Eve, making him the first surgeon. Therefore, medicine is the oldest profession."

The engineer replied, "But, before that, God created the heavens and earth from chaos, thus he was the first engineer. Therefore, engineering is an older profession than medicine."

Then, the economist spoke up. "Yes," he said, "But who do you think created the chaos?"

aj

The First Law of Economists: For every economist, there exists an equal and opposite economist.
The Second Law of Economists: They're both wrong.

fresno dan

Pareto's law of optimal economic theory:
an economic theory has reached an optimal state when no other economist can make it wronger

pat b

The Third Law of Economists : The two economists theories don't add up.

twonine

"Economics is extremely useful as a form of employment for economists."
― John Kenneth Galbraith

gordon

JKG has some excellent one-liners. My favourite:

"The trouble with competition is that in the end somebody wins."

Joe Hill

"Again, since I'm not an economist I really have no idea what the wrong solution is."

~ @RudyHavenstein

Ramanan

[The financial crisis is worse than thought …]

James Hacker: Bernard, Humphrey should have seen this coming and warned me.

Bernard Woolley: I don't think Sir Humphrey understands economics, Prime Minister; he did read Classics, you know.

James Hacker: What about Sir Frank? He's head of the Treasury!

Bernard Woolley: Well I'm afraid he's at an even greater disadvantage in understanding economics: he's an economist.

– Yes Prime Minister, A Real Partnership

JEHR

More economist jokes here: http://www3.nd.edu/~jstiver/jokes.htm

flora

Economists: purveyors of fictions upon which the superstructure of organized robbery is raised.
(apologies to Ambrose Bierce)

Synoia

Q: What do you call an Economist who tells the truth?

A: Unemployed.

Ivy

If you laid all the economists end to end,

it would probably be a good thing.

They still wouldn't reach a conclusion.

ben

A farmer and two bankers are shipwrecked on an island. Two weeks later help finally arrives. The bankers greet their rescuer who remarks how well they look.

BankerA: "we realised the potential of the natural resources on this island were tremendous".

BankerB: "I created some fiat money, we divided it up. I lent BankerA ten times my share for a coconut farm startup, he invested ten times his share in an accountancy startup."

Rescuer: "well that's amazing, only where is it all, I don't see any produce – how did you actually survive?"

BankerA: "We each used our debt to invest in futures given the fertile land it was clear the land could generate wealth once labour was applied. We both realised significant paper profits. Oh and we ate the farmer"

--

Bankers live off our backs.

Nortino

What did the supply curve say to the demand curve?

If you shift a little to the right, I'll give you some more of what you want.

_________

Why did the economist cross the road?

Because his models predicted he would.

TG

"Market Failure" is the name that economists who believe that the market cannot ever fail use when the market fails.

Synoia

Hmm, it seems you should take your own advice to heart. :-)

What is a person called who claims to predict the future and has a history of 100% failure in predictions?

a) A Charlatan
b) An Economist
c) A prophet

afreeman

In the same vein:
econ entropy: money invented from hot air evaporates, what do you expect?

Warren

"Economists put decimal points in their forecasts to show that they have a sense of humour"
- William Gilmore Simms (https://twitter.com/TheBrowser/status/680887672890589184?s=17)

TG

How many economists does it take to screw in a lightbulb?

Only one, but the lightbulb has to be hanging from the ceiling. Because economists can only screw things up.

Minnie Mouse

It takes one economist to change a light bulb and take the entire power grid down.

James McFadden

"Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else." Lyndon Johnson

[Dec 30, 2015] On Pareto Opt imality

Notable quotes:
"... the ideal markets that would produce Pareto Optimal allocations dont actually exist ..."
"... moving from actually existing non-ideal markets to ideal markets WOULD NOT BE Pareto Optimal even if it was possible to do so, which it isnt. ..."
"... In short, Pareto Optiimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bullshit. ..."
"... The next step in graduate students indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a principle of compensation. The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest. Funny how that happens. ..."
Dec 30, 2015 | Economist's View
Sandwichman, December 30, 2015 at 10:06 AM
"Graduate students of economics learn, early in their careers, that markets allocations are Pareto Optimal."

What they don't learn is that

1. the ideal markets that would produce Pareto Optimal allocations don't actually exist and

2. moving from actually existing non-ideal markets to ideal markets WOULD NOT BE Pareto Optimal even if it was possible to do so, which it isn't.

In short, Pareto Optiimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bullshit.

The next step in graduate students' indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a "principle of compensation." The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest. Funny how that happens.

anne said in reply to Sandwichman

Pareto Optimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bull----.

[ Agreed completely and I think this an important conclusion. ]

Paine said in reply to anne

Yes

Sandy gets the guts of it

Though

The compensation principle is precisely what Pareto rule is all about

Yes we can scramble the goods all we want so long as in the end everyone is at least as well off as before the scramble

In a pure exchange model this is less exciting then in a one period production model

Going on to an inter temporal model with an infinite horizon gets into real juicy Wonderlands

The academy makes it's living as much by distracting fine minds as training them

anne said in reply to Sandwichman

The next step in graduate students' indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a "principle of compensation." The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest....

http://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html

December 29, 2015

Richest in U.S. Shape Private Tax System to Save Billions
By NOAM SCHEIBER and PATRICIA COHEN

The very wealthiest families are able to quietly shape tax policy that will allow them to shield millions, if not billions, of their income using maneuvers available only to several thousand Americans.

anne said in reply to Sandwichman...

Supposing I understand the essay, Roger Farmer is just writing the logical justification to Herbert Spencer's (never Charles Darwin's) "survival of the fittest" rationale that Spencer made wildly popular after Darwin published "On the Origin of Species."

Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire" capitalism. Spencer sold a biological justification, Farmer is selling a logical justification of Empire.

Sandwichman said in reply to anne

No, I think Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed.

The bottom line is that NO ONE would have ever paid any attention to the not just "weak" but nonsensical concept if it didn't serve the function of justifying and ultimately glorifying great inequalities of wealth and income.
;

anne said in reply to Sandwichman

I understand the argument and I am entirely right:

Roger Farmer is just writing the logical justification to Herbert Spencer's (never Charles Darwin's) "survival of the fittest" rationale that Spencer made wildly popular after Darwin published "On the Origin of Species."

Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire" capitalism. Spencer sold a biological justification, Farmer is selling a logical justification of Empire capitalism.

anne said in reply to Sandwichman

I needed to be sure the argument was as empty morally as I supposed initially, but I supposed correctly. The Roger Farmer essay is an amoral logical justification of imperial capitalism. Plato's "Republic" conceived amorally. ;

anne said in reply to Sandwichman

A mean little essay, carefully subtle and mean.

Paine said in reply to anne

But Anne as sandy points out Roger blows up the use of Pareto by his future generations argument

Those unable to establish their preferences are unaccounted for in the scrum

He uses this to draw a bold distinction between securities markets and fish catch of the day markets

Paine said in reply to Paine

It's not the way I'd make his point

But his distinction is important

Some are impacted that are not participating

Third party effects that can not be resolved even with repeated " games "
Because the players are not yet present

anne said in reply to Sandwichman

Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed.

The bottom line is that NO ONE would have ever paid any attention to the not just "weak" but nonsensical concept if it didn't serve the function of justifying and ultimately glorifying great inequalities of wealth and income.

[ Agreed completely, but this argument runs with mine. ]

anne said in reply to Sandwichman

Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed....

[ The issue is that Roger Farmer leaves Pareto Optimality unscathed, and this is an essential point. The essay is beyond the morality of now, but there is no beyond. ]

[Dec 30, 2015] IMF chief Lagarde warns of disappointing global growth in 2016

Notable quotes:
"... Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the Fed begins what is expected to be a series of interest rate increases. ..."
www.theguardian.com

The IMF managing director, Christine Lagarde, said the prospect of rising interest rates in the US and an economic slowdown in China were feeding uncertainty and a higher risk of economic vulnerability worldwide.

Added to that, growth in global trade has slowed considerably and a decline in raw material prices was posing problems for economies reliant on commodities, while many countries still had weak financial sectors as the financial risks increase in emerging markets, she said.

"All of that means global growth will be disappointing and uneven in 2016," Lagarde said, noting that mid-term prospects had also weakened as low productivity, ageing populations and the effects of the global financial crisis dampened growth. In October, the IMF forecast that the world economy would grow by 3.6% in 2016.

... ... ....

Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the Fed begins what is expected to be a series of interest rate increases.

Lagarde warned that rising US interest rates and a stronger dollar could lead to companies defaulting on their payments and that this could "infect" banks and states.

[Dec 29, 2015] The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed

Notable quotes:
"... The obvious candidate for this dark force [correlation between (rising) inequality and (low) growth] is crony capitalism. When a country succumbs to cronyism, friends of the rulers are able to appropriate large amounts of wealth for themselves -- for example, by being awarded government-protected monopolies over certain markets, as in Russia after the fall of communism. That will obviously lead to inequality of income and wealth. It will also make the economy inefficient, since money is flowing to unproductive cronies. Cronyism may also reduce growth by allowing the wealthy to exert greater influence on political policy, creating inefficient subsidies for themselves and unfair penalties for their rivals. ..."
"... The real problem is that money does not go to where it should go, as we see for example in the United States. The money does not flow into the real economy, because the transmission mechanism is broken. That is why we have a bubble in the financial system. The answer is not to tighten monetary policy, but to reform monetary policy so as to ensure that the money gets to the right place... ..."
"... As Stiglitz notes, the transmission mechanisms are broken. Economists trickle down monetary policy might work in theory, but not in practice, as we have seen for the last seven years, when low rates dont trickle down and were wasted instead on asset speculation by the 1%. ..."
"... Reform of the Fed, and the end of cronyism are essential to making sure that the stimulus of low rates gets to Main Street, to ordinary people, and not primarily to asset speculators. ..."
"... The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort - not to fight phantom inflation. ..."
"... And in one sentence Summers illustrates exactly why we dodged a bullet in not appointing Summers to be Fed Chair. Preserving the power of the Fed is not the most important policy. Changing the Fed composition so that it is more consumer friendly and not dominated by Wall Street interests is the most important policy change needed. ..."
"... the Balkanized character of US banking regulation is indefensible and would be ended. The worst regulatory idea of the 20th century-the dual banking system-persists into the 21st. The idea is that we have two systems one regulated by the States and the Fed and the other regulated by the OCC so banks have choice. With ambitious regulators eager to expand their reach, the inevitable result is a race to the bottom. ..."
"... Summers is also calling for higher capital requirements. Excellent stuff! ..."
Dec 29, 2015 | Economist's View

'The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed'

This is the beginning of a long response from Larry Summers to an op-ed by Bernie Sanders:
The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed : Bernie Sanders had an op Ed in the New York Times on Fed reform last week that provides an opportunity to reflect on the Fed and financial reform more generally. I think that Sanders is right in his central point that financial policy is overly influenced by financial interests to its detriment and that it is essential that this be repaired.

At the same time, reform requires careful reflection if it is not to be counterproductive. And it is important in approaching issues of reform not to give ammunition to right wing critics of the Fed who would deny it the capacity to engage in the kind of crisis responses that have judged in their totality been successful in responding to the financial crisis.

The most important policy priority with respect to the Fed is protecting it from stone age monetary ideas like a return to the gold standard, or turning policymaking over to a formula, or removing the dual mandate commanding the Fed to worry about unemployment as well as inflation. ...

JohnH said...
Disagree!!! There is more to this than just interest rates. There is the matter of how the policy gets implemented--who gets low rates. Currently the low rates serve mostly the 1%, who profit enormously from them. Case in point: Mort Zuckerberg's 1% mortgage!

"The obvious candidate for this dark force [correlation between (rising) inequality and (low) growth] is crony capitalism. When a country succumbs to cronyism, friends of the rulers are able to appropriate large amounts of wealth for themselves -- for example, by being awarded government-protected monopolies over certain markets, as in Russia after the fall of communism. That will obviously lead to inequality of income and wealth. It will also make the economy inefficient, since money is flowing to unproductive cronies. Cronyism may also reduce growth by allowing the wealthy to exert greater influence on political policy, creating inefficient subsidies for themselves and unfair penalties for their rivals."

http://www.bloombergview.com/articles/2015-12-24/cronyism-causes-the-worst-kind-of-inequality

As we know (although most here steadfastly ignore it) the Fed is rife with crony capitalism. As Bernie pointed out, 4 of the regional governors are from Goldman Sachs. Other examples are abundant. Quite simply, the system is rigged to benefit the few, minimizing any potential trickle down.

If a broad economic recovery is the goal, ending cronyism at the Fed is likely to be far more effective that low interest rates channeled only to the 1%.

JohnH said in reply to JohnH...
Stiglitz:

The real problem is that money does not go to where it should go, as we see for example in the United States. The money does not flow into the real economy, because the transmission mechanism is broken. That is why we have a bubble in the financial system. The answer is not to tighten monetary policy, but to reform monetary policy so as to ensure that the money gets to the right place...

Small and medium enterprises cannot borrow money at zero interest rates - not even a private person, I wish I could do that (laughs). I'm more worried about the loan interest rates, which are still too high. Access for small and medium enterprises to credit is too expensive. That's why it is so important that the transmission mechanism work..."
http://www.cash.ch/news/alle/stiglitz-billiggeld-lost-kein-problem-3393853-448

And let's not forget consumer credit rates, which barely dropped during the Great Recession and are still well above 10%. Even mortgage lending, which primarily benefits the affluent, have been stagnant for years despite historically low rates.

As Stiglitz notes, the transmission mechanisms are broken. Economists' trickle down monetary policy might work in theory, but not in practice, as we have seen for the last seven years, when low rates don't trickle down and were wasted instead on asset speculation by the 1%.

Reform of the Fed, and the end of cronyism are essential to making sure that the stimulus of low rates gets to Main Street, to ordinary people, and not primarily to asset speculators.

Peter K. said in reply to JohnH...

Bernie Sanders:

"The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort - not to fight phantom inflation. "

http://www.nytimes.com/2015/12/23/opinion/bernie-sanders-to-rein-in-wall-street-fix-the-fed.html

EMichael said in reply to Peter K....

It is hilarious.

"He's right! But his policies are wrong!"

You couldn't make this up......

JF said...
The financial system reform legislation in 2017 will also need to include these matters:

1. Licensure fees and higher and more differential income taxation rates based on the type of financial trading ratios the entities have (in order to direct more emphasis to real-economy lending and away from speculative and leveraged positions used in the financial asset trading marketplaces, so hedge funds probably would face the highest rates in income taxation). For a certain period after enactment these added taxes would be payable by the banks using their excess reserves, which will simply be eliminated until the reserve accounts return to the historically normal period when excess reserves were very small (there would no longer be a need for IOER, as the excess would be eliminated by operation of the taxation statutes). Attaching added ways & means statutes to all the financial service entities also serves to 'cover' some more of huge financial risk held by society and produced by them while the success of this huge sector actually contributes to the financing of self-government - which is also an indirect way to attach high Net Worth being used).

2. New statutory provisions need to reach any and all entities in the financial community regardless of definitions based on the functions they serve or provide (or the way they are named - so yes, the prior separation for deposit-management banking from investing activities can still happen, but this only helps to define which of the differential provisions apply, not help the entity escape them). Perhaps as a result Bank Holding Companies and other large entities won't use a complex network of hundreds of subsidiaries as these would not then serve as a way to avoid taxation, regulatory standards on what are prudent expectations, or supervision; or be used simply to obfuscate -- so investors and regulators can't see the truth of matters.

3. The newly named central bank needs to hold the discretion to buy Treasury bonds directly from the Treasury. This would discipline these fundamental asset-trading marketplaces and the huge primary dealer group of entities, and weaken the fox-and-hen-house influence on public finance.

4. New accounting approaches for the central bank would clarify what happens should the Congress direct redemption amounts or asset sales for the public's purposes. A good portion of the current FRB's book of owned assets can be redeemed or sold without affecting the 'power' of the central bank, and the proceeds used then, for example, to lower payroll taxes via a direct transfer to the social security trust fund's set of accounts).

Senator Sanders, good stuff. Bring out the vote, let us get others in Congress with whom you can work.

BillB said...
Summers: "The most important policy priority with respect to the Fed is protecting it from stone age monetary ideas like a return to the gold standard, or turning policymaking over to a formula, or removing the dual mandate commanding the Fed to worry about unemployment as well as inflation."

And in one sentence Summers illustrates exactly why we dodged a bullet in not appointing Summers to be Fed Chair. Preserving the power of the Fed is not the most important policy. Changing the Fed composition so that it is more consumer friendly and not dominated by Wall Street interests is the most important policy change needed.

Summers argument is the same we always hear from so-called "centrists." "You hippies should shut up because you are helping the opposition."

You hear the same sort of argument with respect to Black Lives Matter.

pgl said in reply to pgl...

On financial regulation - Summers is spot on here:

"the Balkanized character of US banking regulation is indefensible and would be ended. The worst regulatory idea of the 20th century-the dual banking system-persists into the 21st. The idea is that we have two systems one regulated by the States and the Fed and the other regulated by the OCC so banks have choice. With ambitious regulators eager to expand their reach, the inevitable result is a race to the bottom."

It is called regulatory capture.

Summers is also calling for higher capital requirements. Excellent stuff!

[Dec 27, 2015] Summer Rerun Why America Will Need Some Elements of a Welfare State

Notable quotes:
"... Wolf concludes that America cannot do without some form of a welfare state, specifically improved training, education, and universal health care. ..."
"... Our problem is that we are asking for concessions that are beyond the acceptable limit for elites in any historical epoch. We're asking the powerful and the rich to give up their money and power for the greater good of all mankind. This is not likely to happen unless a powerful enough segment of the elite comes to the inescapable conclusion that they're literally dead meat if they don't and therefore opts for survival over position. ..."
"... Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire ..."
Dec 27, 2015 | naked capitalism

An excellent column by Martin Wolf in the Financial Times, where he is the lead economics editor. Starting with principles put forward by Ben Bernanke in his recent speech on income inequality, Wolf concludes that America cannot do without some form of a welfare state, specifically improved training, education, and universal health care.

James Levy, December 26, 2015 at 4:32 pm

I have no idea if Marx was right, in the long run, or wrong–the verdict is still out on the long-term viability of industrial capitalism, which is less than 250 years old and creaking mightily as I write this. It may be that when Rosa Luxemburg said that the choice was between Socialism and Barbarism, she underestimated how likely barbarism was. What I do know is that capitalism today isn't just too ugly to tolerate, it is downright murderous. Its imperatives are driving the despoliation of the planet. It's love of profit over all else is cutting corners and creating externalities that are lethal. But it has made a few percent of the global population comfortable and powerful, and they are holding onto that comfort and that power come hell or high water (and, ironically, if things continue apace both are on the menu).

Our problem is that we are asking for concessions that are beyond the acceptable limit for elites in any historical epoch. We're asking the powerful and the rich to give up their money and power for the greater good of all mankind. This is not likely to happen unless a powerful enough segment of the elite comes to the inescapable conclusion that they're literally dead meat if they don't and therefore opts for survival over position. I am not enthusiastic that this will happen before it is way too late to save more than a fraction of the current world population, and send those people back to the lifestyles and thought patterns of 30 Year's War Europe.

    1. digi_owl

      Its a generational thing. Right after WW2, many of the elite had just that epiphany that unless they have the common people behind them, they are toast. But now they are dead or dying, and their grandkids are basically once more thinking that they can go it alone. This because they have not had the required experiences that help develop the wisdom.

      Reply
  1. Paul Tioxon

    What Marx saw long ago, we can see today, and without relegating ourselves to his analysis, come to our own conclusions. Contradictions, summed up well by Lincoln as a house divided against itself cannot stand is just as true today. Millions of guns to protect the citizenry from tyranny have only resulted in a 1/4 million murders and 5 times as many shootings since Jan 1, 2000, some placing people in wheel chairs and other crippling gunshot afflictions, and more and more institutionalized state oppression, economic exploitation and miserable lives propped up in an alcoholic haze until the liver or brain gives out. We have more food than we know what to do with so we throw away almost as much as we eat. And we have eaten ourselves into morbid obesity, diabetes and heart disease. The contradictions abound from the kitchen table to the kitchen cabinet of the White House where there seems to be nothing passed so freely as bad advice.

    The Welfare State arose from the sacrifices of the population in giving their sweat, blood and tears to defend their nation during war, to be rewarded for their sacrifices, rewards which were demands for power sharing and more in the paycheck, more benefits and more time to enjoy the life spent in a more prosperous world. It seems to me that Obamacare is not simply in death spiral all of its own making, but even more so, because it is the best attempt capitalism can produce in an America that is the most capitalist of societies down to the marrow its bones. Little competition from the Church or the social relations between nobles and subjects set for in the laws that were disestablished to free markets for commodification and money making. Money making enterprises structured the laws from slavery, to the voting franchise with little from the state to cushion any of the hardships of life in America.

    Health care is the largest industry we have. It is approaching 20% of the GNP. I remember the great national freak out in the late 1970s when congress realized it was approaching 10%. Nothing seems to be stopping the costs from spiraling upward and onward. No risk of deflation here where nothing is spared to save a life, operate on some poor little afflicted child, or buy a piece of equipment the size of an office building that shoots a proton beam at cancer, one cancer cell at a time.

    When Obama Care becomes a clear burden to even the democrats who can point to it now as some sort of accomplishment, and it is an accomplishment for the people who finally get to see a doctor, get into a hospital, get that operation or diagnosis that saves their lives, when even those accomplishments number in the millions, it will be part of a health care industry for which $Trillions of dollars can no longer be justified or even funded. As that financial collapse approaches, it would be better for politicians to declare the defeat of a program better rolled into one universal single payer system currently operating as Medicare, than try to reform, shore up or the old tried and true public lie, get rid of its waste and corruption.

    Declare victory with Medicare as the solution and put everyone into it. The only paper work left should be each person's medical history with diagnosis and healing as the happy ending to the story.

    Reply
  2. jgordon

    There is a fundamental error in perception in the Western world that is so pervasive that people can't even see it. As a most basic component of a healthy society people need to be able to survive at a local community level without outside support. Only after that is taken care of should people concern themselves with luxuries, inter-community and international relations.

    Welfare–not to mention other government services–can appear to have positive impacts if one only looks at their effects in isolation, however I think there is a devastating and pernicious impact on people's ability to form community bonds and have local resilience with things like welfare.

    Also, let's also not forget that Americans consume far more of the earth's precious resources than any other group in the world. Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire. Do these recipients of empire benefits have a moral right to share in the loot of empire? Perhaps instead of domestic welfare it would be more ethical for the American empire to provide social benefits for the indigenous peoples who are forced from their lands to work like slaves for the empire's benefit. Although admittedly if the American empire used it's loot for the benefit of the foreign peoples whose lives it destroyed then there'd probably be nothing left to spread around to the military, or to pacify and police the domestic population. So I suppose that's not a serious proposal.

    Reply
    1. Left in Wisconsin

      Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire

      This is obviously not true. Unless every social democratic country in the world is considered as a piece of the American empire. And even then, I would argue that we can easily afford a generous welfare state with a small shift in priorities away from (globally destabilizing) defense spending to social productive spending on human development.

      Reply
      1. jgordon

        Obvious to who? America lavishes so much money on its military not only because of corruption, but also because it has the world reserve currency and is a guarantor of the safety of international shipping. These facts are inextricably linked to the America's status as the world hegemon. The empire provides order and structure, and enforces the extraction of resources from the periphery to the center. The bread and circuses are inextricably linked to the empire's military activities and trying to tease them apart will only lead to collapse of the entire system sooner than it will otherwise happen.

        "Social Democratic"–now that's an interesting phrase. Did you know that Syria is a democracy, and was an extremely prosperous and well-education nation prior to 2011?

        Reply
        1. Vatch

          "Did you know that Syria is a democracy"

          Here's a telling paragraph from the Wikipedia article about Syria:

          Hafez al-Assad died on 10 June 2000. His son, Bashar al-Assad, was elected President in an election in which he ran unopposed.[68] His election saw the birth of the Damascus Spring and hopes of reform, but by autumn 2001 the authorities had suppressed the movement, imprisoning some of its leading intellectuals.[84] Instead, reforms have been limited to some market reforms.

          [Dec 27, 2015] The Sneaky Way Austerity Got Sold to the Public Like Snake Oil

          Notable quotes:
          "... When children don't get good educations, the production of knowledge falls into private control. Power gets consolidated. The official theoretical frameworks that benefit the most powerful get locked in. ..."
          "... Not only were the politicians worried about votes but also the welfare state was a way to head off a left wing revolution. ..."
          "... the change began in 1976 with the election of Rockefeller-funded Jimmy Carter, who immediately launched an austerity program. Support for Keynesian economics was further eroded by the 70's stagflation which we now know was caused by Mid East oil but at the time the "left" were like deer in the headlights, with no clue what to do. ..."
          "... The final nail in the coffin was the fall of the Berlin Wall and the collapse of the USSR, discrediting communism. After that, "there was no alternative" to corporate capitalism. Or more accurately, the left was slow to formulate an alternative and to this day is still struggling with an alternative as we have observed with Syriza. It's not enough to oppose austerity, you have to have a constructive plan to fix things. ..."
          Dec 27, 2015 | naked capitalism
          LP: You indicate that this approach to budgeting was invented as a way of making the New Deal acceptable to the business community. How did that work? Over time, who has benefitted from it? Who has lost?

          OC: Back in the 1940s, workers were fighting for their rights, class struggle was heating up, and soldiers would soon be returning from the fronts. At that point, a new business organization, the Committee for Economic Development (CED), came together. Led by Beardsley Ruml and other influential business figures, the CED played a crucial role in developing a conservative approach to Keynesian economics that helped make policies that would help put all Americans to work acceptable to the business community.

          The idea was that more consumers would translate into more profits - which is good for business. After all, the economic experts and budget technicians said so, not just the politicians. And the business leaders were told that economic growth and price stability would go along with this, which they liked.

          But things changed progressively over the 1970s and early 1980s. Firms went global. They became financialized. The balance of power between workers and owners started to shift more towards the owners, the capitalists. People were told they needed to sacrifice, to accept cuts to social spending and fewer rights and benefits on the job - all in the name of economic science and capitalism. The CAB was turned into a tool for preventing excessive spending - or justifying selected cuts.

          Middle class folks were afraid that inflation would erode their savings, so they were more keen to approve draconian measures to cut wages and reduce public budgets. People on the lower rungs of the economic ladder felt the pain first. But eventually the middle class fell on the wrong side of the fence, too. Most of them became relatively poorer.

          I suppose this shows the limits of democracy when information, knowledge, and ultimately power are unequally distributed.

          LP: You're really talking about birth of austerity and the way lies about public spending and budgets have been sold to the public. Why is austerity such a powerful idea and why do politicians still win elections promoting it?

          OC: Austerity is so powerful today because it feeds off of itself. It makes people uncertain about their lives, their debts, and their jobs. They become afraid. It's a strong disciplinary mechanism. People stop joining forces and the political status quo gets locked down.

          Even the
          name of this tool, the "cyclically adjusted budget," carries an aura of respect. It diverts our attention. We don't question it. It creates a barrier between the individual and the political realm: it undermines democratic participation itself. This obscure theory validates, with its authority, a big economic mistake that sounds like common sense but is actually snake oil - the notion that the federal government budget is like a household budget. Actually, it isn't. Your household doesn't collect taxes. It doesn't print money. It works very differently, yet the nonsense that it should behave exactly like a household budget gets repeated by politicians and policymakers who really just want to squeeze ordinary people.

          LP: How does all this play out in the U.S. and in Europe?

          OC: The European Union requires its members to comply with something called a cyclically adjusted budget constraint. Each country has to review its economic and fiscal plans with the European Commission and prove that those are compatible with the Pact. It's a ceiling on a country's deficit, but it's also much more than that.

          Thanks to the estimate, the governments of Italy or Spain, for example, are supposed to force the economy toward some ideal economic condition, the definition of which is obviously quite controversial and has so far rewarded those countries that have implemented labor market deregulation, cut pensions, and even changed the way elections happen. Again, it's a control mechanism.

          In the U.S. this scenario plays out, too, although less strictly. Talk about the budget often relies on the same shifty and politically-shaded statistical tools to support one argument or the other. Usually we hear arguments that suggest we have to cut social programs and workers' rights and benefits or face economic doom. Tune in to the presidential debates and you'll hear this played out - and it isn't strictly limited to one party.

          LP: How do we stop powerful players from co-opting economics and budgets for their own purposes?

          OC: Our education system is increasingly unequal and deprived of public resources. This is true in the U.S. but also in Europe, where the crisis accelerated a process that was already underway. When children don't get good educations, the production of knowledge falls into private control. Power gets consolidated. The official theoretical frameworks that benefit the most powerful get locked in.

          In the economic field, we need to engage different points of view and keep challenging dominant narratives and frameworks. One day, human curiosity will save us from intellectual prostitution.

          craazyboy, December 25, 2015 at 10:10 am

          Most people don't eat, go to college, use healthcare, rent or buy housing on the east or west coast, or purchase military equipment (except perhaps small time stuff like assault rifles), so the BLS greatly underweights(or hedonics prices, or just pulls rent data outta their butts) these things in the inflation data they create. The Fed then goes into a tizzy if the data comes in a few tenths of a percent below 2%, even if the data spent years above 2%, and floods the country in liquidity so our job creators – banks and large corporations – will hire us and give us raises, and once they finish doing that, the BLS will signal that inflation is 2% and the Fed will then know all our problems are solved. It just takes time.

          See the book "Treasure Island" for how things are going on the revenue side. But more tax breaks for large corporations and the wealthy are needed so we don't force them to do any illegal tax avoidance stuff and they will then happily pay whatever they think their fair should be. Might be zero. They will then have money to buy stuff too, which is a big plus as well, when you think about it.

          So clearly, you can see why deficit spending almost seems inevitable.

          Then the next problem is we still have unemployment, and something needs to be done about that. For instance, lots of room for more government contracts for social purposes. Take Obamacare. Place a single source contract, now estimated between $1 and $2 billion, with a Canadian systems company that employs independent contractor Indian programmers. Eventually, we have Obamacare!

          We can do this if we just get serious about this and say "No More Austerity In America!"

          likbez, December 27, 2015 at 9:31 pm

          Emperor Severus is famously said to have given the advice to his sons: "Be harmonious, enrich the soldiers, and scorn all other men"

          Brooklin Bridge

          Can education provide the solution?

          I suspect that the educational bias occurs at all levels in the sense that much the same misinformation is provided regardless of neighborhood but progressively wrapped in more elegant pedagogical flim-flam-ery for the owner class. Basically, the bias changes, but not the message, as one goes from poor (austerity – this is your lot in life) to wealthy (austerity – you were born to make the tough decisions, it's in your genes – and you'll just have to accept the rewards, man up to your destiny and toss em a quarter on Sundays). The upper class does get a far better education, but the bias is or becomes unconscious over time.

          Basically, aristocracy is a nasty brutish cycle that keeps upping the ante of consequences.

          washunate, December 26, 2015 at 8:09 am

          Yves, INET and NEP and others have been lecturing that topic for years. How many trillions of dollars do we have to deficit spend before the failure of things to improve indicts the hypothesis itself?

          Maybe what matters is not the amount of the spending, but rather, the distribution.

          And what is so bad about deflation? The attachment of moral judgment to inflation and deflation is rather bizarre outside of establishment monetary economics. The basic monetary problem confronting the bottom 80% or so of American households is inflation, not deflation.


          Dan Lynch, December 25, 2015 at 11:27 am

          I don't buy the article's historical narrative.

          Conservatives have ALWAYS opposed spending on social programs and ALWAYS used the deficit as an excuse (unless the deficit was due to war or tax cuts for the rich). This was true during the New Deal; FDR himself was a deficit hawk.

          Nonetheless for years the public supported social programs and no politician dared to cut them. Not only were the politicians worried about votes but also the welfare state was a way to head off a left wing revolution.

          What changed? I would say the change began in 1976 with the election of Rockefeller-funded Jimmy Carter, who immediately launched an austerity program. Support for Keynesian economics was further eroded by the 70's stagflation which we now know was caused by Mid East oil but at the time the "left" were like deer in the headlights, with no clue what to do.

          The final nail in the coffin was the fall of the Berlin Wall and the collapse of the USSR, discrediting communism. After that, "there was no alternative" to corporate capitalism. Or more accurately, the left was slow to formulate an alternative and to this day is still struggling with an alternative as we have observed with Syriza. It's not enough to oppose austerity, you have to have a constructive plan to fix things.

          Vatch, December 25, 2015 at 12:40 pm

          History teaches us that peacetime austerity can be horribly disastrous. Some examples:

          British austerity during the 19th century included the Great Irish Famine of 1845-1849: The Irish population was about 8 million people in 1841, and the death toll of the famine was at least a million. This is a huge percentage loss of life. Due to the combination of deaths with emigration and births that did not occur, the 1851 population of 6.5 million was estimated to be about 2.5 million lower than expected. Since food was exported during the famine, this was definitely an extreme case of austerity.

          Soviet austerity during the 1930s: Millions died, and food was exported during the famine period of 1931-1933. Austerity is often associate with conservatives, so I guess conservative austerity enthusiasts must be pleased with the performance of the eminent conservative Josef Stalin.

          Chinese austerity during the Great Leap Forward of 1958-1962: Tens of millions died - perhaps as many as 45 million. The same irony about conservatives and Stalin is true about conservatives and Mao, but on a far greater scale.

          Merry Christmas.

          ben chifley

          july 24 2015: Krugman:Ignore the 'MIT gang' at US economy's peril Paul Krugman says while economists of the '70s discarded Keynes, he never went away at MIT.‏
          http://www.chron.com/opinion/outlook/article/Krugman-Ignore-the-MIT-gang-at-US-economy-s-6404243.php

          MIT: Libertarian Haven | Independent Political Report‏
          http://www.independentpoliticalreport.com/2011/01/mit-libertarian-haven/

          Soros | MIT Global Education & Career Development‏
          https://gecd.mit.edu/go-abroad/distinguished-fellowships/explore-fellowships/soros

          washunate

          This is a pretty remarkable piece of rambling drivel. To the extent coherent points can be taken away from this, it appears there are at least two major flaws:

          1) There is absolutely no link between public opinion and CAB. Germany chooses to have national healthcare, passenger rail, and renewable energy. The US chooses to have national security, predatory medicine, and car-dependent sprawl.

          2) There is absolutely no link between austerity and concentration of wealth and power. France has a much more equal distribution of wealth than the US. Yet the US has run enormous deficits while France is supposedly constrained by the techno mumbo jumbo nonsense of the EU.

          The notion that 'austerity' is sold to the public is just a blatant falsehood. Americans don't support the budget priorities in Washington. It's a collective action problem, not a public opinion problem.

[Dec 27, 2015] This Junk Bond Derivative Index Is Saying Something Scary About Defaults

Bloomberg Business

Citigroup analysts led by Anindya Basu point out that spreads on the CDX HY, as the index is known, are currently pricing in an expected loss of 21.2 percent, which translates into something like 22 defaults over the next five years if one assumes zero recovery for investors. That is a pretty big number once you consider that a total of 41 CDX HY constituents have defaulted since the index really began trading in 2005, equating to about 3.72 defaults per year. A big chunk of those defaults (17) occurred in 2009 in the aftermath of the financial crisis.

What to make of it all? Actual recoveries during corporate default cycles tend to be higher than the worst-case scenario of zero percent. In fact, they average somewhere in the 26 percent range, which would imply 29 defaults over the next five years instead of 41.

So what? you might say. The CDX HY includes but one default cycle, and those types of analyses tend to underestimate the peril of tail risk scenarios (hello, subprime crisis). Citi has an answer for that, too. Using spreads from the cash bond market going back to 1991, they forecast the default rate over the next 12 months to be something more like 5 percent to 5.5 percent. (For comparison, the rating agency Moody's is currently forecasting a 3.77 percent default rate.)

[Dec 27, 2015] 2016 will be a year of living dangerously for the global economy

Notable quotes:
"... WW I happened after 20 yrs during which the the superpower Britain had been blatantly replacing their dwindling economic influence by demonstrations of military powers. Now which nation today is siphoning off by ever more military means the products and raw materials of others, while not even caring a bit about welfare for the majority of their own citizens? ..."
"... But its so much easier to make propaganda against Mr Putins public appearances than seriously address the point that this guy is genuinely popular at home precisely because he refuses his country to be a sellout to USAs 1O %. ..."
Dec 27, 2015 | The Guardian

marketingexpert -> HorseCart 27 Dec 2015 14:38

If the big borrower nations like GB and USA were honest, it would be electoral suicide because all they could promise is massive reduction in living standards back to a level we can afford

And that will happen either by progressive erosion or catastrophic bubble burst and economiccollapse.

But It is so much easier Lefty fashion to promise jam today for everyone, and invent bogus bogeymen to pay for it all, or pretend you can borrow or print to prosperity. Anyone north of a five year old can see through such nonsense from the day they trade mars bars for marbles,

Buy gold, or farmland.

lingyai -> SrdeAth 27 Dec 2015 14:25

that's what the US has all those military bases around the world for.. can't have the world reserve currency being threatened...

KillerMarmot -> Lafcadio1944 27 Dec 2015 14:25

Neoliberalism is going to provide prosperity when clear-eyed analysis shows Neoliberalism to be little more than subjugation to oligarch rule and the most egregious inequity the world has ever known.

Actually the world is more prosperous than it has ever been. Over the last few decades, billions of people have been lifted out of abject poverty into something resembling a modern lifestyle. Infant mortality has been falling steadily. Life expectancy has been raising steadily. It is resounding triumph, but one that is little recognized,

Marjallche -> gilesjuk 27 Dec 2015 13:02

Yes I actually think it is, as dependencies breed fear of being exploited, breeds distrust as to whether the other side does or does not threaten with blackmail etc. I got the idea from Keynes, who saw stability in self-reliance of nations and instability in population import, which threw the balance in favour of big capital.

Marjallche -> JudiHoskyn885 27 Dec 2015 12:57

WW I happened after 20 yrs during which the the superpower Britain had been blatantly replacing their dwindling economic influence by demonstrations of military powers. Now which nation today is siphoning off by ever more military means the products and raw materials of others, while not even caring a bit about welfare for the majority of their own citizens?

But it's so much easier to make propaganda against Mr Putin's public appearances than seriously address the point that this guy is genuinely popular at home precisely because he refuses his country to be a sellout to USA's 1O %. Another pre WWI parallel. PS it seems to be a very anglo-saxon notion that the upper 10% belong to a better and preferable breed of humans. The rest being granted the "freedom" to crawl in the dirt and die in the name of "freedom" for the preservation of their "democratic" 1%ers privilege.

Iconoclastick 27 Dec 2015 12:54

It was bad in 2012, it's got far worse.

as the chart below shows, if there is anything the global financial system needs, is for the rating agencies, bond vigilantes, and lastly, general public itself, to realize that the UK's consolidated debt (non-financial, financial, government and household) to GDP is... just under 1000%. That's right: the UK debt, when one adds to its more tenable sovereign debt tranche all the other debt carried on UK books (and thus making the transfer of private debt to the public balance sheet impossible), is nearly ten times greater than the country's GDP. To call that "game over" is an insult to game overs everywhere.


http://www.zerohedge.com/news/psssst-france-here-why-you-may-want-cool-it-britain-bashing-uks-950-debt-gdp

Sammy Johnston -> gilesjuk 27 Dec 2015 12:41

All political parties follow the will of the banking families and corporate elites. The economy is in it's intended state, gearing up for the third world war, the formation of world government and the eventual digitalization of currency world wide.

To state that cameron has any control is naive. To say corbyn can be effective to oppose it is naive. We need to eliminate our current elite and start a new paradigm to have any sense of freedom again.

MancuMan -> eveofchange 27 Dec 2015 12:50

Aye, a few million people got murdered by the Communists but apart from that and the lack of joy in life for the survivors it all went very well indeed and we should give it another go.

ldopas -> eveofchange 27 Dec 2015 12:37

I see you have been studying the socialist comics again.

Evidence tells us, evidence, that capitalism has problems. Lots of them. But it does work for the most part, and the model of capitalism also when there is a disruption mostly recovers like a cut in the skin that heals. Socialism wherever tried ALWAYS has produced poor if not catastrophic results, and once a downward spiral is established there is nothing to stop it, no mechanism in place to heal it like capitalism.

So my money, pun intended, is with capitalism.

Look if you are fed up of our capitalist first world services, infrastructure and healthcare there are still a few deluded places where some sort of socialism exists; Cuba for example where everyone is equal in poverty and their infrastructure is non existent, perhaps N Korea?

Ask yourself this. when a country that is poor and gets the chance for democracy, why do they always go more capitalistic?

eveofchange -> jonsnow92 27 Dec 2015 12:25

I have told you what would happen if capitalism continues.

I opposed Stalin and his ilk, and his corruption of socialism. But under even he, Russia escaped the economic collapse of the thirties, and was invaded by a country that had been ravaged by capitalism's collapse . Russia even emerged stronger.

The nationalised economy worked perfectly, and defeated capitalist Germany (although Hitler himself,introduced aspects of socialism--as did the UK and US). But without a workers and working class democracy, nationalisation will not work for any length of time .

jonsnow92 -> eveofchange 27 Dec 2015 12:17

unless consciously overthrown by a working class takeover for socialism, would still carry on. What do you want?

It didn't work in USSR did it? The working class took over and it didn't end up in milk and honey on the streets. Same for East Germany - apart from the genius of Trabant not much else going on until the people started voting with their feet jumping walls and going to capitalism. And I didn't mention Albania, Cuba, North Korea and other great success stories from socialism.

BTW - in socialist countries you couldn't have a strike as the working class was in power and as Stalin said: "why would the working class strike if they are in power?"

eveofchange 27 Dec 2015 12:02

The problem is capitalism, as Marx correctly pointed out and analysed. One "solution" always leads to a worse problem---and it cannot be resolved,or solved Eventually there is either a major war, between desperate capitalist states fighting over shrinking markets, or there is a gigantic crash.--or both.This literally wipes out productive capacity, and thus the problem of "overproduction" is temporarily "solved". The same cycle is then repeated, to it's inevitable conclusion--again.
Millions, throughout the world, even in the UK, are made destitute by this, or even die--but capitalism, unless consciously overthrown by a working class takeover for socialism, would still carry on. What do you want?

> newsfreak 27 Dec 2015 13:33

The ambiguity of economic and financial forecasters tend to reach proverbial limits. They make a living out of ambiguity and what later end up being frustrated expectations: "2016 will be a year of living dangerously for the global economy" yet "there will be no explosion in 2016, but a fuse will be lit." How dangerous is a lit fuse? The whole financial world system is a sham based on printing currencies with no backing standard. At some point there will be a wake up call, a reality check, and a devastating free fall.

ID7829806 27 Dec 2015 11:58

Economic forecasting is a mug's game.

But a lot of people get paid a lot of money to do it. Forecasting is of course, at best, an inexact and purely speculative effort (I nearly wrote 'an inexact science', but there is nothing scientific about it, at all).

Those who have the confidence/cheek/arrogance to predict, tend to stick close to the average of an (emerging) consensus, if there is one. Commentators keep looking around and over their shoulders - no one wants to look silly - and so feed-on and affirm each other. Few stick their necks out - but then, if they do, they are likely unknown or a maverick, and does anyone therefore notice, or care?

A broken clock is right twice a day, but who wants to predict that the clock will fall off the wall (unless they have inside knowledge)?

Larry, you may be right. Or you may be wrong. 2016 is an Election Year in the US, which suggests 'nothing to see here' for the next 12 months. But then again, it didn't stop the last crash happening.

But the feeling in your water could be right, precisely because we are in unknown and unprecedented territory. The historic economic 'rule-book' hasn't so much been torn-up in recent years, rather - quietly - put back on the shelve, and self-consciously ignored.

These are unprecedented times. So: who knows what might happen? An unprecedented economic implosion round about 2017 is possible. Or not. But on a balance of probabilities: something without precedent is likely to happen (for good or ill): and none of us will have predicted it.

Dan_de_Macy 27 Dec 2015 11:58

Prediction:

Going South: Why Britain will have a Third World Economy by 2014 Paperback – 14 Jun 2012

http://www.amazon.co.uk/Going-South-Britain-Third-Economy/dp/0230392547

Reality:

http://www.theguardian.com/politics/2015/apr/17/imf-chief-praises-british-governments-handling-of-economy

Iconoclastick 27 Dec 2015 11:50

Other stuff building up a storm on the horizon...

Forget About Junk Bonds, This Is the New Credit-Equity Disconnect Investors Should Be Watching
Can contagion spread to stocks?

http://www.bloomberg.com/news/articles/2015-12-15/forget-about-junk-bonds-this-is-the-new-credit-equity-disconnect-investors-should-be-watching

This Junk Bond Derivative Index Is Saying Something Scary About Defaults. Markit's CDX index is pricing in a 2008-like selloff.

http://www.bloomberg.com/news/articles/2015-12-16/this-junk-bond-derivative-index-is-saying-something-scary-about-defaults

[Dec 24, 2015] In 2012, Greek pension funds, which were obliged under Greek law to own government bonds were hit by debt write-down and lost about 10 billion euros or roughly 60 percent of their reserves

econbrowser.com
Jeffrey J. Brown

In reading the following NYT article about the Greek Crisis, with an emphasis on pensions and pensioners, I recalled Professor Hamilton's post on the US Social Security system. To borrow Warren Buffet's phrase about finding out who is skinny dipping when the tide goes out, I wonder if the tide has just receded faster for Greece than for the US, in terms of over promised and under-funded Social Security and pension plans, especially in regard to vastly underfunded state and local government pension plans. And of course, federal government owns both the asset and the liability for the Social Security Trust Fund

http://www.nytimes.com/2015/06/09/world/europe/greece-pensions-debt-negotiations-alexis-tsipras.html?hpw&rref=business&action=click&pgtype=Homepage&module=well-region&region=bottom-well&WT.nav=bottom-well&_r=0

Greece's social security system was troubled even before the crisis, already divided into more than 130 funds and offering a crazy quilt of early-retirement options that were a monument to past political patronage.

In 2012, the pension funds, which were obliged under Greek law to own government bonds*, were hit by a huge debt write-down as those bonds plummeted in value. As a result they lost about 10 billion euros, or $11.1 billion - roughly 60 percent of their reserves.

Greece's creditors, seeking to make the Greek labor market more competitive, insisted that the government reduce the amount companies and workers must contribute toward pensions. And they insisted that Greece reduce its minimum wage so that those who do contribute have smaller outlays.

At the same time, the pension system was becoming an even bigger component of the social safety net, absorbing thousands. People like Ms. Meliou retired early, either because of the sale of state-owned companies, because they feared their salaries would be cut and thus their pensions would be smaller, or simply because their businesses failed. Few are living comfortably, and many support unemployed children.

*Remind you of another system?

[Dec 24, 2015] An Aging Society Is No Problem When Wages Rise

Notable quotes:
"... Hey, if the plutocrats won't raise wages then they will need to raise the payroll tax cap on Social Security. They should have thought of that before starting so many wars. The Bonus Army will not be denied. ..."
"... Raise it my foot, they need to eliminate it. The cap has always been more welfare for the rich. ..."
"... Why not eliminate the income cap ($118k) entirely and start taxing capital gains and dividends for Social Security too? Members of Congress pay this tax on 65% of the salaries ($174k), while 95% of all wage earners pay this tax on 100% of their earnings. ..."
economistsview.typepad.com

Dean Baker:

An Aging Society Is No Problem When Wages Rise: Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.
While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.
We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)
The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.
For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.

RC AKA Darryl, Ron said...

Hey, if the plutocrats won't raise wages then they will need to raise the payroll tax cap on Social Security. They should have thought of that before starting so many wars. The Bonus Army will not be denied.

DrDick -> Darryl, Ron...

"they will need to raise the payroll tax cap on Social Security"

Raise it my foot, they need to eliminate it. The cap has always been more welfare for the rich.

Bud Meyers -> DrDick...

Why not eliminate the income cap ($118k) entirely and start taxing capital gains and dividends for Social Security too? Members of Congress pay this tax on 65% of the salaries ($174k), while 95% of all wage earners pay this tax on 100% of their earnings.

mulp

"We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised."

Illogical!

If wages of younger workers were maintaining the same gains over their previous generation peers, and in fact, gained even more due to reduced supply of workers relative to steady demand for labor as the large boomer cohort leaves the labor force to the smaller subsequent generation.

Instead, conservative free lunch economicntheory, itself grossly illogical, has led to cuts in wages as a matter of policy based on the idea that workers are not consumers, so gdp can grow faster if workers are paid less, leading to a larger supply of consumers with pockets of money being created by the tinker bell of wealth.

While changing demographics might require higher payroll taxes, say younger generations having more kids than the boomer generation and being stay at home parents than boomers were, in reality, the younger generations are moving further along the trend line of working more, just like the boomers.

Incomes are falling leading to reduced gdp growth because that is driven by labor incomes which are labor costs, and lower gdp means lower wage income means lower tax revenue with a fixed tax rate.

Social Security has structural problems simply because conservatives have sold Americans a bill of goods, promising something for nothing.

TANSTAAFL

As a leading edge boomer, I've had the best of both good and bad policy. Great big government benefits when young to give me a great start in life, followed by bad policy tax hikes for me paid for by screwing the generation of children I did not have, and now 68, getting the great big government Social Security benefits Reagan signed into law in 1983, doubly great because, my big government start in life lasted to 2001 and made me very rich from simply working and living like my parents who were shaped by the depression. And Republicans can not cut my benefits because I'm hidden in the biggest block of the Republican base who almost all depend on Social Security.

[Dec 24, 2015] The Fed Has Created A Monster And Just Made A Dangerous Mistake, Stephen Roach Warns

Zero Hedge
Stephen Roach is worried that the Fed has set the world up for another financial market meltdown.

Lower for longer rates and the proliferation of unconventional monetary policy have created "a breeding ground for asset bubbles, credit bubbles, and all-too frequent crises, so the Fed is really a part of the problem of financial instability rather than trying to provide a sense of calm in an otherwise unstable world," Roach told Bloomberg TV in an interview conducted a little over a week ago.

To be sure, Roach's sentiments have become par for the proverbial course. That is, it may have taken everyone a while (as in five years or so) to come to the conclusion we reached long ago, namely that central banks are setting the world up for a crisis that will make 2008 look like a walk in the park, but most of the "very serious" people are now getting concerned. Take BofAML for instance, who, in a note we outlined on Wednesday, demonstrated the prevailing dynamic with the following useful graphic:

Perhaps Jeremy Grantham put it best: "..in the Greenspan/ Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully- fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006."

Indeed. It's with that in mind that we bring you the following excerpts from a new piece by Roach in which the former Morgan Stanley chief economist and Yale fellow recounts the evolution of the Fed and how the FOMC ultimately became "beholden to the monster it had created".

* * *

From "The Perils of Fed Gradualism" as posted at Project Syndicate

By now, it's an all-too-familiar drill. After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization.

A majority of financial market participants applaud this strategy. In fact, it is a dangerous mistake. The Fed is borrowing a page from the script of its last normalization campaign – the incremental rate hikes of 2004-2006 that followed the extraordinary accommodation of 2001-2003. Just as that earlier gradualism set the stage for a devastating financial crisis and a horrific recession in 2008-2009, there is mounting risk of yet another accident on what promises to be an even longer road to normalization.

The problem arises because the Fed, like other major central banks, has now become a creature of financial markets rather than a steward of the real economy. This transformation has been under way since the late 1980s, when monetary discipline broke the back of inflation and the Fed was faced with new challenges.

The challenges of the post-inflation era came to a head during Alan Greenspan's 18-and-a-half-year tenure as Fed Chair. The stock-market crash of October 19, 1987 – occurring only 69 days after Greenspan had been sworn in – provided a hint of what was to come. In response to a one-day 23% plunge in US equity prices, the Fed moved aggressively to support the brokerage system and purchase government securities.

In retrospect, this was the template for what became known as the "Greenspan put" – massive Fed liquidity injections aimed at stemming financial-market disruptions in the aftermath of a crisis. As the markets were battered repeatedly in the years to follow – from the savings-and-loan crisis (late 1980s) and the Gulf War (1990-1991) to the Asian Financial Crisis (1997-1998) and terrorist attacks (September 11, 2001) – the Greenspan put became an essential element of the Fed's market-driven tactics.

The Fed had, in effect, become beholden to the monster it had created. The corollary was that it had also become steadfast in protecting the financial-market-based underpinnings of the US economy.

Largely for that reason, and fearful of "Japan Syndrome" in the aftermath of the collapse of the US equity bubble, the Fed remained overly accommodative during the 2003-2006 period. The federal funds rate was held at a 46-year low of 1% through June 2004, before being raised 17 times in small increments of 25 basis points per move over the two-year period from mid-2004 to mid-2006. Yet it was precisely during this period of gradual normalization and prolonged accommodation that unbridled risk-taking sowed the seeds of the Great Crisis that was soon to come.

Today's Fed inherits the deeply entrenched moral hazard of the Asset Economy. The longer the Fed remains trapped in this mindset, the tougher its dilemma becomes – and the greater the systemic risks in financial markets and the asset-dependent US economy.

Full post here

* * *

Roach goes on to say that we're already seeing the beginnings of what may very well turn out to be a dramatic unwind as high yield rolls over and the emerging world struggles to cope with a soaring dollar (remember, even though EM has largely avoided "original sin" i.e. borrowing in dollars, at the sovereign level, corporates are another story).

As an aside, those interested in a comprehensive account of what Roach covers in the article cited above are encouraged to reach David Stockman's "The Great Deformation."

[Dec 23, 2015] The neocon's abiding faith in the so-called revolution in military affairs (RMA) has proved to be a colossal failure

peakoilbarrel.com

Glenn Stehle, 12/22/2015 at 12:11 pm

Watcher said:

This stuff about giving up . . . why do you want to give up. Fund weapons to prepare to TAKE what you must have.

But, as John Mearsheimer explains in this article, the neocon's abiding faith in the so-called revolution in military affairs (RMA) has proved to be a collossal failure:

In particular, they believed that the United States could rely on stealth technology, air-delivered precision-guided weapons, and small but highly mobile ground forces to win quick and decisive victories. They believed that the RMA gave the Bush administration a nimble military instrument which, to put it in Muhammad Ali's terminology, could "float like a butterfly and sting like a bee." ….

The real trouble comes once the United States owns the country it has overrun, and the Americans are seen as occupiers and face an insurgency. The RMA is largely useless in combatting an insurgency, against which a large army is needed, as the Bush administration has discovered in Iraq. But once the United States commits huge numbers of soldiers in a country like Iraq, it is no longer free to invade other countries because it is effectively stuck in a quagmire.

https://www.opendemocracy.net/democracy-americanpower/morgenthau_2522.jsp

So in light of that colossal failure of the RMA in Afghanistan and Iraq, what now?

The chest thumping rings a little bit hollow, to say the least.

Watcher, 12/23/2015 at 10:36 am
Rest assured if the Air Force had won its preference, there would have been no US Army involvement nor anyone particularly on the ground. There is no proof that the boots on the ground are required to hold territory makes any sense when you can dictate policy with precision strikes. And you can. "Do this, or die." After all, how many US Army or UK Army boots on the ground were required to remove Gadaffi?

Nobody "found out" that you had to have troops on site to do things. The Army lobbied for that to be sure they didn't lose funding. As did all the Congress critters with Army bases in their districts. As opposed to Air Force bases.

Think about it. Do you really think carrier based bombing is necessary? If you needed more sorties, you could send more Air Force aircraft. But the Navy has to defend its own funding, too.

Jimmy, 12/23/2015 at 11:26 am
"There is no proof that the boots on the ground are required to hold territory makes any sense when you can dictate policy with precision strikes. And you can. "Do this, or die."………"

Where have you been since 2001? If all it takes is air power to dictate policy then please explain to my why USA isn't dictating policy in Afghanistan, Iraq, Syria and Libya and seeing enthusiastic compliance with said policy by those on the ground. Removing Gaddafi is not difficult with air power however it took guys with AKs on the ground to put a bullet in his head.

If you suggest launching multimillion dollar air campaigns every time a handful of kids with RPGs and AKs get uppity you'll quickly find yourself on the losing side of the balance sheet of war. Keep it up for too long and you'll be broke. Your rivals will make sure of it with a very small expenditure.

You've obviously never served in the military. Dream on.

Fred Magyar, 12/23/2015 at 12:53 pm
If you suggest launching multimillion dollar air campaigns every time a handful of kids with RPGs and AKs get uppity you'll quickly find yourself on the losing side of the balance sheet of war. Keep it up for too long and you'll be broke. Your rivals will make sure of it with a very small expenditure.

Yup!

https://goo.gl/DMxx4f

The entire concept of 'GROUND' and 'TERRITORY' is so last century…
What matters today is digital control and governments just don't get it.

oldfarmermac, 12/23/2015 at 12:03 pm
While I generally disagree with Watcher on economics, I have to agree that he has a point regarding the efficacy of air power and infighting among the various branches of the armed services for status, resources, and political clout.

It is nowadays obviously possible to literally bomb any country with any significant industrial infrastructure back into the stone age using conventional, meaning non nuclear, bombs, and to do it at far less cost in men than putting troops on the ground.

One modern bomber, flying out of reach of anybody on the ground equipped with less than the latest and hardest to get anti air technology, can take out a dozen bridges, or a tank farm, or a water treatment plant, or a dozen office buildings- or for that matter a dozen hospitals. One or two " sorties" is enough to wipe out almost any kind of major industrial installation, or damage it past operation for many months on end.

In WWII, most of the bombs dropped landed hundreds of yards to miles away from the intended targets. Modern bombs can literally be aimed at a given WINDOW in a large building, with a very high probability of not missing that window more than a few feet, and actually hitting it quite often.

It is not a question of " can't be done" but rather whether the aggressor is willing to pay the price in the court of public opinion at home and world wide, and deal with the political repercussions.

So far no nation with the capability of bombing this way on the grand scale has been willing to actually do it.

But this does not prove that it will never be done.

All the major powers in WWII would have done it, if they had possessed the ability to do so at that time, if the leadership had concluded it would save the lives of countless men of their own and brought the war to a faster conclusion.

The US for instance firebombed some German cities with results that were ac quite comparable to the destruction of Hiroshima and Nagasaki with atom bombs.

And for what it is worth, we seldom hear much about nuclear weapons, except the scare stories involving mutant creatures and radioactivity levels being so high people will not be able to live where the bombs fall for centuries.

In actual fact, if only a few bombs are used, and they are designed so as to minimize fallout, people will be able to live where they are dropped within a decade, no problem, in terms of the big picture.Sure a few kids, maybe a lot of kids, would get cancer, but that would be a minor problem compared to lack of water , food, shelter,employment, etc.

One "MIRV" ICBM loaded with neutron bombs, or a couple of flights of heavy bombers protected by fighter air craft, could just about wipe out the entire urban population of a fair sized country in a matter of minutes or hours at the most.

There wouldn't be enough people LEFT to seriously dispute possession of the country with an occupying ground force.

I PRAY such a grand scale genocidal air war will never come to pass, but anybody who has bothered to look into the TECHNICAL possibility of such a war understands that it COULD HAPPEN.

At one time I read a book about the history of WWII once a week or so for a couple of years. It got to be a personal quest to understand how it started, and how it played out, and why.

The folks who argue that bombing the hell out of the Germans did not prevent them from increasing production of some armaments deliberately miss the point, for partisan reasons. The question should be rephrased, how much MORE would the GERMANS have been able to produce, and how many MORE men, and how many MORE planes and guns etc, they would have been able to put on OFFENSIVE rather than DEFENSIVE assignments.

The bombing nay sayers also avoid discussing the obvious fact that ninety percent of bombs hit their targets these days, where as in WWII more than ninety percent missed by a substantial margin.

Modern bombers will come home nearly every sortie. Any country initiating an air war is apt to have overwhelming air superiority,meaning plenty of fighter escorts, and modern bombers are stealthy and fly way too high for ordinary anti aircraft guns to reach them.

For now, nobody except the USA, Russia, and a couple of larger NATO countries could manage it.

But in a couple of decades, there might be other countries able to do it, and DESPERATE ENOUGH to do it.

One thing about military tech that people often fail to appreciate is that it often gets exponentially cheaper as time passes. The computers and guidance systems etc needed for a smart bomb were state of the art top secret stuff couple of decades ago. A decade from today, a good team of engineers will probably be able to design and BUILD smart bombs using readily available commercial technology.

A sharp kid could probably build a workable guidance system today hacking it together out of security camera and drone parts, with a smart phone sized computer programmed for just this one job. He might even be able to hack and reprogram a smart phone to serve as both the camera and the computer.

Suppose Iran and Iraq have another go a decade down the road. Either or both countries may have large arsenals of smart bombs, and planes to deliver them.

likbez, 12/23/2015 at 2:01 pm
"It is nowadays obviously possible to literally bomb any country with any significant industrial infrastructure back into the stone age using conventional, meaning non nuclear, bombs, and to do it at far less cost in men than putting troops on the ground. "

First of all bombers that are not reachable by modern air defense systems do not exist.

Also your implicit assumption is that attacked country does not have nuclear weapons (or at least dirty bombs) and means to deliver them to the aggressor. Or allies with such weapons.

And that such an attack will never lead to global thermonuclear war. In case nuclear winter materialize that's a postponed death sentence for the majority of population of the winner of such conflict.

So your statement is not true about China, Russia, EU, Israel, India, Pakistan, North Korea and several other countries with significant industrial infrastructure.

Also after Iraq war air defense systems developed at huge speed and now systems like S400 represent a huge obstacle to bombing without losing your own aircraft. Even older S300 systems are dangerous as Russians discovered during Georgia conflict.

If colonel Gaddafi was wiser and bought a dozen of S300 systems he might well be still alive as the idea of losing of half of aircraft would be a deterrent for French.

https://en.wikipedia.org/wiki/S-400_(missile)

=== quote ===
Maximum targeting range (detection radius is wider).

For a ballistic target (speed of 4800 m/s and a radar cross-section of 0.4 square meters): 230 km.

For a target with RCS of 4 square meters: 390 km.

For targeting of strategic – bomber sized types: 570 km.

Ves, 12/23/2015 at 9:05 pm
Mac,
Don't fantasies about any wars. Wars are not video games. If it is that simple US wouldn't do a war sequel every 10 years: "Gulf War I", "Gulf War II", and now you have proxy "Gulf War III" ..well let me ask you how many times you will bang your head in the wall before you realize that it does not work? It's just does not work.

Mac, you are too much consumed with garbage news that does not allow you to connect the dots. The Gulf War I was in the 90's and the world oil supply was relatively plentiful to absorb the shocks. Forward 2003 and Gulf War II and during and after the conflict the price of oil quadrupled and world economy pretty much got suffocated by 2008.

This time around the Gulf War III that is ongoing but obviously your favorite TV channel has not informed you, has to be proxy and relatively low intensity war otherwise with the hot war we would have a high price of oil beyond any imagination.

If you think you can run modern wars during prolonged period with high oil prices and having somewhat functioning economy then you have read wrong history books. It doesn't mean that they will not have another "go". But if they do you will be walking and not driving 20 miles to the closest grocery store.

[Dec 23, 2015] The Texas unempolyment rate is up 12% since the cyclical low in July-Aug

peakoilbarrel.com
BC, 12/21/2015 at 3:57 pm
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2XOQ

The Texas U rate is up 12% since the cyclical low in July-Aug, which similarly occurred in May-June 2008, Apr 2001, and Feb 1980.

Employment, particularly the U rate, is a lagging indicator.

https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2XP0

There are notable similarities between today and 1985-86 during the previous energy bust. However, real GDP per capita was growing at more than twice today's rate; peak Boomer demographic tailwinds were building; debt to wages and GDP was much lower; the price of oil fell to the $20s; interest rates were higher and setting up to decline, providing a once-in-a-lifetime, debt-induced, reflationary growth phase (that ended with the GFC); the US economy had not yet begun to deindustrialize; health care spending was one-half of today's level as a share of GDP; and inequality had not yet become extreme.

Texas entered recession in Q1-Q2 and the rest of the US economy is following behind. Prepare accordingly.

Clueless, 12/21/2015 at 4:58 pm
BC – I am too old and without enough energy [no pun intended, which always means pun] to research and respond to your points. Except with questions. In 1986, what was the US GDP as a % of world GDP? And what is that % today? What was the Texas GDP as a % of US GDP? And what is that % today? In 1986, how much money [billions of $] was the US just printing? And how much today?

I turned 21 in 1962. For the next 40 years, every chart pattern with respect to stocks, bonds, real estate, etc for the next 40 years was compared to the Great Depression. Every comparison ended up being total nonsense.

If I could give anyone some wisdom, it would be "Do not look at the past. It was totally different." In the Great Depression the farmers were broke [and, about 1/3 of Americans were farmers]. Lately, they are the wealthiest group of Americans. Yes, greater, on average than lawyers, doctors, and even investment bankers. The elderly, were the most in dire need. Today, with Social Security, Medicare, free food, pensions, their own houses, etc., they are the most content of any age group [per AARP]. And, the future is changing faster now than it was back in 1962-2002.

First, I want to thank Ron for having this blog. Merry Christmas, regardless of what you believe. And, I really do not know what your work experience was, but, it is of no matter. Other than to ask: Have you ever seen more opportunity staring you in the face? Years of lower new discoveries, especially with the "elephant" fields. Continuing, slow, but steady demand growth. I think that there is a big collision coming, especially with the 20-40 year olds that somehow believe that oil should be $20/barrel, gas under a 1$, and unlimited supply with the "new" technology. Some kind of disconnect. Their I-phones have kept going up in cost [the gold standard of technology], but oil will not. Some people are in for a rude awakening.

Let me add a Merry Christmas and a Happy & Prosperous New Year's wish to all.

[Dec 23, 2015] The Big Short Every American Should See This Movie

Notable quotes:
"... Enjoyed the movie, but in typical Hollywood fashion, the role of the Federal Reserve and government in pushing housing down to those unable to afford it was not even mentioned once. ..."
Zero Hedge
The Big Short opens nationwide today. But it happened to have one showing last night at a theater near me. My youngest son and I hopped in the car and went to see it. I loved the book by Michael Lewis. The cast assembled for the movie was top notch, but having the director of Anchorman and Talledaga Nights handle a subject matter like high finance seemed odd.

The choice of Adam McKay as director turned out to be brilliant. The question was how do you make a movie about the housing market, mortgage backed securities, collateralized debt obligations, collateralized debt swaps, and synthetic CDOs interesting for the average person. He succeeded beyond all expectations.

Interweaving pop culture icons, music, symbols of materialism, and unforgettable characters, McKay has created a masterpiece about the greed, stupidity, hubris, and arrogance of Wall Street bankers gone wild. He captures the idiocy and complete capture of the rating agencies (S&P, Moodys). He reveals the ineptitude and dysfunction of the SEC, where the goal of these regulators was to get a high paying job with banks they were supposed to regulate. He skewers the faux financial journalists at the Wall Street Journal who didn't want to rock the boat with the truth about the greatest fraud ever committed.

...Ultimately, it is a highly entertaining movie with the right moral overtone, despite non-stop profanity that captures the true nature of Wall Street traders. This is a dangerous movie for Wall Street, the government, and the establishment in general. They count on the complexity of Wall Street to confuse the average person and make their eyes glaze over. That makes it easier for them to keep committing fraud and harvesting the nation's wealth.

This movie cuts through the crap and reveals those in power to be corrupt, greedy weasels who aren't really as smart as they want you to think they are. The finale of the movie is sobering and infuriating. After unequivocally proving that Wall Street bankers, aided and abetted by the Federal Reserve, Congress, the SEC, and the mainstream media, destroyed the global financial system, put tens of millions out of work, got six million people tossed from their homes, and created the worst crisis since the Great Depression, the filmmakers are left to provide the depressing conclusion.

No bankers went to jail. The Too Big To Fail banks were not broken up – they were bailed out by the American taxpayers. They actually got bigger. Their profits have reached new heights, while the average family has seen their income fall. Wall Street is paying out record bonuses, while 46 million people are on food stamps. Wall Street and their lackeys at the Federal Reserve call the shots in this country. They don't give a fuck about you. And they're doing it again.

Every American should see this movie and get fucking pissed off. The theater was deathly silent at the end of the movie. The audience was stunned by the fact that the criminals on Wall Street got away with the crime of the century, and they're still on the loose. I had a great discussion with my 16 year old son on the way home. At least there is one millennial who understand how bad his generation is getting screwed.

wee-weed up

I read the book last year... It is outstanding! Highest recommendation. If you have not read this book, you cannot understand how today's market really works.

JRobby

This subject matter has to be put in a form that can be understood by the masses. Hopefully the popular actors and this director is a step in that direction.

Main stream Hollywood as an informer? Hmmmmm? This adds to the current assumptions and rumors of fractures among the elite groups.

We are reasonable people. If the banking elite is sacrificed and the other corporate oligarchs come into a more socially acceptable line, we may be satisfied. However, the banking elite must be sacrificed. There is no negotiation on that point.

Of course some will say I am over optimistic, they are throwing it in our faces to make $$$ and it ends up a total police state so enjoy your "entertainment" for now.

Time goes on. Time will tell.

chunga

First you'd have to believe that politicians give a fuck about any damn thing but themselves. REAL concern for minorities or communities LOL! Then you'd have to believe banks were forced to do *anything* they don't want.

Then, you'd have to fall right to sleep and miss the part where all this crap was sold on Wall Street while at the same time betting against all the "shitty deals" they made, then the whole thing getting bailed out @ par. With par being at the absurd fraudulent property appraisals that were made by the lenders or their agents. It's just nuts.

This was all planned, beginning with Greenspan. AIG's Greenberg KNEW their CDS paper was no damn good, but didn't care because the also KNEW there would be a bailout. The only problem for him was Paulson and Blankfein conspired to steal the bailout money...and they did!

That's why all this money went looking for people...it was all planned.

chunga

Hundreds of scandals have gone by since then, thoroughly unpunished, so I wonder why this movie is coming out now. I looked into some of the cronies calling the shots at the GSE's back then and saved it. A lot is outdated by now. Seems like a fairly bi-partisan effort.

FRANKLIN RAINES [D] – FNMA CEO (1999 – 2004) Raines accepted "early retirement" from his CEO position while the SEC pretended to investigate accounting irregularities. Fannie's own OHFHEO also accused him of abetting widespread accounting errors, including the shifting of losses, so he and his fellow execs could "earn" large bonuses. The WSJ reported back in 2008 that Raines was one of several cronies that received below market rates for mortgages from Countrywide. Raines alone receive loans for over $3 million while CEO of FNMA. Raines' compensation for his "work" at FNMA - $90 million.

RAINES GRADE – F

DANIEL MUDD [R] – FNMA CEO (2005 – 2008) Before becoming CEO of FNMA, Mudd worked at the Office of the Secretary of Defense, was an advisor to Asia-Pacific Economic Corp., "served" on the board of the Council of Foreign Relations, "consulted" at the World Bank, and held many positions at GE Capital including president and CEO. Mudd was dismissed as CEO of FNMA when FHFA became conservator in 2008. In 2011 Mudd and other GSE execs were charged by SEC with securities fraud. After his career at FNMA Mudd became CEO of a NYC hedge fund named "Fortress". Fortress invested in purchasing tax liens on delinquent property taxes from local governments under many benign corporate names such as "Pleasant Valley Capital" and "Travis Farm Investments". Cozy. Mudd's compensation for his "work" at FNMA - $80 million.

MUDD GRADE – F

NEEL KASHKARI [R] – FNMA CEO (Tenure is murky) Kashkari was a former investment banker for Goldman Sachs, was tapped by Hank "The Shank" Paulson to lend his skills over at TARP HQ, and now rather ironically, continues God's work as a Managing Director at PIMCO. Kashkari's compensation for his "work" at FNMA is also murky; I'll just assume it was too much.

KASHKARI GRADE - F

HERB ALLISON [D] – FNMA CEO (2008 – 2009) The esteemed Mr. Allison was quickly whisked off to oversee the wildly successful TARP program. I didn't find much on his compensation during his brief stint as FNMA CEO. Allison served in various positions at Merrill Lynch and became a member of the board in 1997. He was a director of the NYSE from 2003 – 2005.

ALLISON GRADE – F

MICHAEL WILLIAMS [?] – FNMA CEO (2009 – Jan 1, 2012) Mr. Williams is a 20 year veteran at FNMA. While "serving" as FNMA CEO, Williams managed to scrape by on less than $6 million in 2011 alone. This could and should be considered a hardship, given the complexities involved in purloining ~ $60 billion of Fed bailout money.

WILLIAMS GRADE – F

FANNIE'S MAJOR DANCE PARTNER, FREDDIE MAC, HAS ALSO PERFORMED VERY POORLY.

Charles (my friends call me "Ed") Haldeman has announced his retirement plans but intends to be a good sport and stay on with insolvent FHLMC until another crony can be found to fill his wing-tips.

That might take a while. "Serving" as CEO of the ultimate backstops for the lion's share of the MBS Ponzi is very stressful.

We'll have to accept former Freddie exec David Kellermann's testimony posthumously. Mr. Kellermann was found hanging by the neck in the basement of his posh Vienna, VA home in the affluent suburb of Washington. D.C. way back in April of 2009. It is presumed he had no help and local police have stated there was no evidence of foul play.

Urban Redneck

GREED is non-partisan. And all sides agreed MOAR "home ownership" was desirable. The left got its SJW colorblind automation, while the underwriters were able to increase volumes by thousands of percent while reducing overall headcount. Securitization wasn't actually "automated" since the fuckwits were using MS-Excel, but it was commoditized with Blackrock's pricing model.

These were the days of the original algorithms of mass financial destruction, which were primitive and largely FICO-centric, but everyone wanted to minimize the cost (of logic coding and external data sources) so they coding decisioning based solely on information contained in the mortgage application and the applicant's electronic credit report.

khakuda

Enjoyed the movie, but in typical Hollywood fashion, the role of the Federal Reserve and government in pushing housing down to those unable to afford it was not even mentioned once.

Keynesians

Wall Street is laughing at all the clowns who think this movie will "wake up America". It would have never came out if it was any kind of danger to Wall Street, the FED, or the establishment.

Agent P

Directed by Adam McKay (Anchorman, Step Brothers, The Other Guys....), so ... yeah I'm going to go see it. Remember the end credits for The Other Guys? He hates Wall Street....

GoldenDonuts

Perhaps you should read the book. These are real characters from a non fiction book. They may have changed a name or two but these are real people. I will lend you my copy if you can't afford one.

conraddobler

Yeah I can't imagine a commercially successful movie out of this that would actually tell the truth and make it to the screens.

What someone should do is write one of those fantastical novels where everything is a symbol for something else and jazz it up, put some romance, danger, intrigue and of course big boobs in it.

The real message ala the olden days usually had to be hidden to avoid the wrath of those it was really aimed at.

[Dec 22, 2015] A Milestone For Vanguard: New Fund Could Include Junk Bonds

blogs.barrons.com

,,,,The Vanguard Core Bond Fund, unveiled in a filing with regulators on Monday, is being billed as an actively managed alternative to index funds like the Total Bond Market fund (VBMFX, VBTLX, BND). Its launch, slated for the first three months of 2016, would coincide with a period of great uncertainty in the bond markets. The Fed could mull its next interest-rate hike as soon as March.

... ... ...

Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter and a close watcher of all things Vanguard, was quick to note that the fund could invest in bonds of "any quality." The new fund's fine print shows leeway for Vanguard's portfolio managers to plunk up to 5% of the portfolio in junk bonds. Some 30% of the fund could fall into "medium-quality" bonds.

Vanguard's existing offering in junk debt, the Vanguard High-Yield Corporate Fund (VWEHX, VWEAX), is managed by Wellington Management Company.

Says Wiener: "Vanguard has never offered lesser-quality bond funds run by its internal group. The junk portion of the Core Bond product will be a first."

[Dec 21, 2015] Weak president, neoliberal Obama and housing bubble

Notable quotes:
"... The relationship between low interest rates and bubbles has nothing to do with the above. Low interest rates RAISE asset prices. Through the magic of low discount rates, the future earnings and cash flows are worth a lot higher today. This is why Bernanke cut rates and kept them low. Raising asset prices and the resultant higher net worth was supposed to lead to higher spending today. But outsized returns also attracts speculation. what is so difficult to understand? John Williams of SF Fed has shown how positive returns in asset markets raises the speculators expected returns. when this dynamic gets out of control, it is a bubble. ..."
"... That is exactly the point. Expected returns in stocks have nothing to do with earnings growth. http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2013/september/asset-price-bubbles-tomorrow-yesterday-never-today/ ..."
"... You think a rise in stock prices created by a fall in the cost of capital is a bubble. ..."
"... keeping the risk free rate at zero for 7 years is not a change in fundamentals. and if it is and it rises leading to a large fall in equity prices, you will be the first one crying uncle. so why put the economy through this? ..."
"... Rising stock prices allow corporations to raise debt, because the stock is put up as collateral. This makes funding easier, but it doesnt favor any particular purpose of the funding. It could be to buy back stock, for example. Said buy back can raise the stock price even more, which in turn can pay off the borrowing. Didnt cost a dime. ..."
"... It always seem to me that right wing economists credit businessmen with superhuman foresight and sophistication, except when it comes to the actions of the Fed and then something addles their brains and they become completely stupid. As I once put, it seems investors cant understand what the Fed is doing, even though they tell you. ..."
"... Thats it exactly. Markets are efficient, unless the government does anything, and then markets lose their minds and its the governments fault. ..."
"... Here is how they evaluate models: Good model; one that reaches the right good conclusions. Bad model; one that ends up saying stuff nobody should believe in. ..."
"... Obama could have at least made the investigations a high priority...but he let Holder, a Wall Street attorney, consign them to the lowest. ..."
"... Democrats filibuster-proof majority consisted of 58 Democrats and two independents who caucused with them. Only an inept President and Senate majority leader could have failed to take advantage of such a majority to implement significant parts of the party platform. ..."
"... Gullible folks like pgl and his coterie believe what these Democrats say and waste our time defending their neoliberal behavior. ..."
economistsview.typepad.com
reason said... December 18, 2015 at 02:20 AM
I wish Krugman would attack the view that is being propagated at the moment that low nominal interest rates (it seems irrespective of the reason for them) foster bubbles. It doesn't make the slightest bit of sense - leverage doesn't just magnify the gains, it magnifies the losses as well - what really counts is expectations regardless of nominal interest rates.)

The distribution of the use of credit between pure financial speculation and productive investment is not a function of interest rates, but of things like bank culture, bank regulation and macro-economic and technological prospects.

JF said in reply to reason... December 18, 2015 at 05:19 AM

Great comment. I especially liked this point: "The distribution of the use of credit between pure financial speculation and productive investment is not a function of" ....

Supervising regulators need to look carefully at the ratio of credit used for financial trading compared to credit used for what we've called real-economy matters. They should adjust the level of monitoring based on this view while they also inform policy makers including those in the legislature.

There may be an opportunity in 2017 to revise the statutes so the public plainly says what the rules of Commerce are in these financial 'inter-mediation' areas - society is better served if more of such credit offerings go to investments in the real economy where inputs are real things like employees, supplies, equipment/technologies. The public's law can effect this change.

david said in reply to JF...

except that a significant chunk of institutional investors have sticky nominal targets for return thanks to the politics of return expectation setting (true for pension fund and endowments) -- low interest rates do encourage chasing phantoms or looking to extract some rents, for those subject to that kind of pressure

sanjait said in reply to david... December 18, 2015 at 02:47 PM

Are there enough of those to dominate securities prices?

I don't see how there possibly could be. For everyone trying to reach for yield there are a lot of people happy to arbitrage or otherwise exploit those inefficiencies.

pgl said in reply to reason... December 18, 2015 at 05:53 AM

Nice comment. I think Krugman is letting others take out the bubble brains. But if he's reading your excellent comment - maybe he will go the fray.

BenIsNotYoda said in reply to reason... December 18, 2015 at 06:35 AM

"The distribution of the use of credit between pure financial speculation and productive investment is not a function of interest rates, but of things like bank culture, bank regulation and macro-economic and technological prospects."

The relationship between low interest rates and bubbles has nothing to do with the above. Low interest rates RAISE asset prices. Through the magic of low discount rates, the future earnings and cash flows are worth a lot higher today. This is why Bernanke cut rates and kept them low. Raising asset prices and the resultant higher net worth was supposed to lead to higher spending today. But outsized returns also attracts speculation. what is so difficult to understand? John Williams of SF Fed has shown how positive returns in asset markets raises the speculator's expected returns. when this dynamic gets out of control, it is a bubble.

Sanjait said in reply to BenIsNotYoda... December 18, 2015 at 07:35 AM

It's hard to see how to your claim that expected returns are high when earnings yields across the board are historically low.

BenIsNotYoda said in reply to Sanjait... December 18, 2015 at 07:38 AM

That is exactly the point. Expected returns in stocks have nothing to do with earnings growth. http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2013/september/asset-price-bubbles-tomorrow-yesterday-never-today/

BenIsNotYoda said in reply to BenIsNotYoda... December 18, 2015 at 07:38 AM

I mean earnings yields not earnings growth.

Sanjait said in reply to BenIsNotYoda... December 18, 2015 at 07:48 AM

So you say. And yet, stock values today conform very well with the standard model Williams says doesn't historically fit the data. While you are talking bubbles, the equity risk premium is parked in the normal range.

How do you explain that?

BenIsNotYoda said in reply to Sanjait... December 18, 2015 at 07:54 AM

so says Williams. dividend yields, earnings yields and risk premiums are not necessarily weighted heavily in investors' formation of expected returns. past returns do, to a great extent. that is what Williams shows.

BenIsNotYoda said in reply to BenIsNotYoda... December 18, 2015 at 07:56 AM

our prehistoric brains are wired to trend follow patterns.

pgl said in reply to BenIsNotYoda... December 18, 2015 at 09:13 AM

Williams actually tries to model the rise in stock prices and defines any increase the model cannot explain a bubble. Of course maybe his modeling is not entirely spot on and fundamentals can explain the rise stock prices.

But this is not what you do as you see any asset price increase as a bubble. Which is beyond stupid. Of course it would help if you ever bothered to do what Williams attempted - use a basic model of financial economics. Then again my guess is that is beyond your understanding of basic financial economics. So troll on!

BenIsNotYoda said in reply to pgl... December 18, 2015 at 10:40 AM

You think a rise in stock prices created by a fall in the cost of capital is a bubble. But no - it is a change in fundamentals.

keeping the risk free rate at zero for 7 years is not a change in fundamentals. and if it is and it rises leading to a large fall in equity prices, you will be the first one crying uncle. so why put the economy through this?

JohnH said in reply to pgl... December 18, 2015 at 04:22 PM

The first thing pgl did when stocks corrected this summer was to call for QE4...he panicked because his portfolio was threatened...but claimed that he was only worried about workers!

Fred C. Dobbs said in reply to reason... December 18, 2015 at 10:57 AM

It does not seem reasonable or
fair to pay practically no interest
on savings, which is a consequence
of Fed policy.

A consequence of this is that people
go into risky investments that lead
to catastrophe, sometimes widespread.

If the goal was to get people to spend
(i.e. consume) more, it seems that they
are persistently & stubbornly frugal.

Chris Herbert said in reply to Fred C. Dobbs... December 18, 2015 at 02:31 PM

Rising stock prices allow corporations to raise debt, because the stock is put up as collateral. This makes funding easier, but it doesn't favor any particular purpose of the funding. It could be to buy back stock, for example. Said buy back can raise the stock price even more, which in turn can pay off the borrowing. Didn't cost a dime.

sanjait said in reply to reason...

Let me be the fourth person to compliment that comment.

"leverage doesn't just magnify the gains, it magnifies the losses as well - what really counts is expectations regardless of nominal interest rates."

QFT!

The one hypothetical caveat (as BINY alluded to, knowingly or not) is that expectations often get out of whack based on momentum trading. So hypothetically, lowering rates could possibly feed that.

But guess what? Rates are already at zero. They can't go lower. It's not even a question of lowering rates, but rather whether to keep them where they are. So a bubbles-from-monetary-fed-momentum argument falls completely flat. We've been at zero for 7 years now!

reason said...

It always seem to me that right wing economists credit businessmen with superhuman foresight and sophistication, except when it comes to the actions of the Fed and then something addles their brains and they become completely stupid. As I once put, it seems investors can't understand what the Fed is doing, even though they tell you.

Sanjait said in reply to reason...

That's it exactly. Markets are efficient, unless the government does anything, and then markets lose their minds and it's the government's fault.

And somehow the RW economists see no problem with this model

DeDude said in reply to Sanjait...

Here is how they evaluate models: Good model; one that reaches the "right" good conclusions. Bad model; one that ends up saying stuff nobody should believe in.
likbez said in reply to Sanjait...
"Markets are efficient, unless the government does anything"

This is a dangerous neoliberal dogma. Total lie.

=== quote ===
The efficient market hypothesis (EMH) is a flavor of economic Lysenkoism which became popular for the last 30 years in the USA. It is a pseudo scientific theory or, in more politically correct terms, unrealistic idealization of market behavior. Like classic Lysenkoism in the past was supported by Stalin's totalitarian state, it was supported by the power of neoliberal state, which is the state captured by financial oligarchy (see Casino Capitalism and Quiet coup for more details).

Among the factors ignored by EMH is the positive feedback loop inherent in any system based on factional reserve banking, the level of market players ignorance, unequal access to the real information about the markets, the level of brainwashing performed on "lemmings" by controlled by elite MSM and market manipulation by the largest players and the state.

Economics, it is said, is the study of scarcity. There is, however, one thing that certainly isn't scarce, but which deserves the attention of economists - ignorance.
...Conventional economics analyses how individuals choose - maybe rationally, maybe not - from a range of options. But this raises the question: how do they know what these options are? Many feasible - even optimum - options might not occur to them. This fact has some important implications. ...
Slightly simplifying, we can say that (financial) markets are mainly efficient in separation of fools and their money... And efficient market hypothesis mostly bypasses important question about how the inequity of resources which inevitably affects the outcomes of market participants. For example, the level of education of market players is one aspect of the inequity of resources. Herd behavior is another important, but overlooked in EMH factor.

http://www.softpanorama.org/Skeptics/Financial_skeptic/Casino_capitalism/Pseudo_theories/Permanent_equilibrium_fallacy/Efficient_market_hypothesys/index.shtml

Peter K. said in reply to reason...

And/or the markets are telling the Fed something, like they don't believe the Fed's forecasts about growth and inflation and are betting otherwise, but the hawks at the Fed dismiss the markets and say we need to raise rates now.

It's all very convenient reasoning about markets.

Vile Content said...

"
constant repetition, especially in captive media, keeps this imaginary history in circulation no matter how often it is shown to be false.
"
~~pK~

... ... ...

anne said...

http://krugman.blogs.nytimes.com/2015/11/23/shorts-subject/

November 23, 2015

Shorts Subject
By Paul Krugman

Last night I was invited to a screening of "The Big Short," which I thought was terrific; who knew that collateralized debt obligations and credit default swaps could be made into an edge-of-your-seat narrative (with great acting)?

But there was one shortcut the narrative took, which was understandable and possibly necessary, but still worth noting.

In the film, various eccentrics and oddballs make the discovery that subprime-backed securities are garbage, which is pretty much what happened; but this is wrapped together with their realization that there was a massive housing bubble, which is presented as equally contrary to anything anyone respectable was saying. And that's not quite right.

It's true that Greenspan and others were busy denying the very possibility of a housing bubble. And it's also true that anyone suggesting that such a bubble existed was attacked furiously - "You're only saying that because you hate Bush!" Still, there were a number of economic analysts making the case for a massive bubble. Here's Dean Baker in 2002. * Bill McBride (Calculated Risk) was on the case early and very effectively. I keyed off Baker and McBride, arguing for a bubble in 2004 and making my big statement about the analytics in 2005, ** that is, if anything a bit earlier than most of the events in the film. I'm still fairly proud of that piece, by the way, because I think I got it very right by emphasizing the importance of breaking apart regional trends.

So the bubble itself was something number crunchers could see without delving into the details of mortgage-backed securities, traveling around Florida, or any of the other drama shown in the film. In fact, I'd say that the housing bubble of the mid-2000s was the most obvious thing I've ever seen, and that the refusal of so many people to acknowledge the possibility was a dramatic illustration of motivated reasoning at work.

The financial superstructure built on the bubble was something else; I was clueless about that, and didn't see the financial crisis coming at all.

* http://www.cepr.net/documents/publications/housing_2002_08.pdf

** http://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html

anne said in reply to anne...

http://www.nytimes.com/2002/08/16/opinion/mind-the-gap.html

August 16, 2002

Mind the Gap
By PAUL KRUGMAN

More and more people are using the B-word about the housing market. A recent analysis * by Dean Baker, of the Center for Economic Policy Research, makes a particularly compelling case for a housing bubble. House prices have run well ahead of rents, suggesting that people are now buying houses for speculation rather than merely for shelter. And the explanations one hears for those high prices sound more and more like the rationalizations one heard for Nasdaq 5,000.

If we do have a housing bubble, and it bursts, we'll be looking a lot too Japanese for comfort....

* http://www.cepr.net/documents/publications/housing_2002_08.pdf

anne said in reply to anne...

http://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html

August 8, 2005

That Hissing Sound
By PAUL KRUGMAN

This is the way the bubble ends: not with a pop, but with a hiss.

Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.

So the news that the U.S. housing bubble is over won't come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.

Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble....

EMichael said in reply to anne...

Yeah, the only thing he missed was the timing of the collapse.

The day he wrote this the Fed had already raised rates 250% in one year, on the way to a total of 400% in the next 6 months.

Yet prices accelerated until the top was reached a year after the column.

anne said in reply to EMichael...

http://www.nytimes.com/2006/08/25/opinion/25krugman.html

August 25, 2006

Housing Gets Ugly
By PAUL KRUGMAN

Bubble, bubble, Toll's in trouble. This week, Toll Brothers, the nation's premier builder of McMansions, announced that sales were way off, profits were down, and the company was walking away from already-purchased options on land for future development.

Toll's announcement was one of many indications that the long-feared housing bust has arrived. Home sales are down sharply; home prices, which rose 57 percent over the past five years (and much more than that along the coasts), are now falling in much of the country. The inventory of unsold existing homes is at a 13-year high; builders' confidence is at a 15-year low.

A year ago, Robert Toll, who runs Toll Brothers, was euphoric about the housing boom, declaring: "We've got the supply, and the market has got the demand. So it's a match made in heaven." In a New York Times profile of his company published last October, he dismissed worries about a possible bust. "Why can't real estate just have a boom like every other industry?" he asked. "Why do we have to have a bubble and then a pop?"

The current downturn, Mr. Toll now says, is unlike anything he's seen: sales are slumping despite the absence of any "macroeconomic nasty condition" taking housing down along with the rest of the economy. He suggests that unease about the direction of the country and the war in Iraq is undermining confidence. All I have to say is: pop! ...

EMichael said in reply to anne...

"Mr. Toll now says, is unlike anything he's seen: sales are slumping despite the absence of any "macroeconomic nasty condition""

You gotta love builders and RE agents. It wasn't macro that caused it, it was default rates across the board on supposedly safe investments that caused mortgage money supply to totally disappear.

One day people will understand that payments are the key to all finance.

JohnH said...

"and it is an outrage that basically nobody ended up being punished ."

Yes, indeed. And who do we have to blame for that? Obama and Holder, of course. They made the investigation of mortgage securities fraud DOJ's lowest priority. Krugman's Democratic proclivities prevent him from stating the obvious.

I' m sure that pgl and his band of merry Obamabots will try to spin this in Obama's favor...I.e. Congress prevented him from implementing the law, even though Congress has nothing to do with it.

Fact is, Obama has intentionally been a lame duck ever since he took office. He was even clueless on how to capitalize on a filibuster-proof majority in the midst of an economic crisis...which brings us to Trump. Many are so desperate for leadership after Obama's hollow presidency that they'll even support a racist demagogue to avoid another empty White House.

JohnH said in reply to anne...

Oh, please...Krugman could barely criticize Obama, even when Obama introduced an austerity budget back in 2011.

The tendency of people like Krugman to overlook Democrats' bad behavior only encourages more bad behavior. If Krugman really cared about the policies he champions, he would let the chips fall wherever...and not let empty suits like Obama get away with austerity and failure to enforce the law when Wall Street willfully violates it.

pgl said in reply to JohnH...

Did you forgot to read the post before firing off your usual hate filled fact free rant? Here - let me help you out:

"some members of the new commission had a different goal. George Santayana famously remarked that "those who cannot remember the past are condemned to repeat it." What he didn't point out was that some people want to repeat the past - and that such people have an interest in making sure that we don't remember what happened, or that we remember it wrong. Sure enough, some commission members sought to block consideration of any historical account that might support efforts to rein in runaway bankers."

It seems Krugman indeed bashed how the government sort of let this crooks off the hook. We know you have an insane hatred for President Obama. But do you also hate your poor mom? Why else would you continue to write such incredibly stupid things?

JohnH said in reply to pgl...

As I expected, rationalizations for Obama's refusal to enforce the law...since when does the buck no longer stop at the White House? And what's with trying to defend people who refuse to do their job and uphold the rule of law?

pgl said in reply to JohnH...

Krugman did not rationalize that. Neither have I.

Either you know you are lying or you flunked preK reading.

JohnH said in reply to pgl...

Of course pgl rationalizs Obama's failures...he spent a lot of time denying that Obama introduced and signed off on austerity...and that he proposed cutting Social Security. And now he can't admit that Obama and Holder have refused to defend the rule of law by not prosecuting...or even seriously investigating...Wall Street criminality.

RGC said in reply to William...

Prosecutions don't require congressional action.

Most of the New Deal was accomplished in 100 days.

Promotion by a president can galvanize action.

pgl said in reply to EMichael...

The lack of prosecutions was a bad thing. Of course any prosecutor would tell you putting rich people in jail for anything is often difficult. Rich people get to hire expensive, talented, and otherwise slimy defense attorneys. I have to laugh at the idea that JohnH thinks he could have pulled this off. The slimy defense attorneys would have had his lunch before the judge's gavel could come down.

JohnH said in reply to pgl...

Obama could have at least made the investigations a high priority...but he let Holder, a Wall Street attorney, consign them to the lowest.

pgl is intent on explaining away Obama's failure to enforce the law...thereby encouraging more lawlessness.

JohnH said in reply to William...

Democrats' filibuster-proof majority consisted of 58 Democrats and two independents who caucused with them. Only an inept President and Senate majority leader could have failed to take advantage of such a majority to implement significant parts of the party platform. Even Lieberman had a good record on many issues. Except for ACA, it turned out to be a do-nothing Congress, reflecting an abject lack of leadership...which is why many are so desperate for leadership. Having lacked it for seven years, many are willing to turn to anybody, even Trump, to provide it. Pathetic!

RGC said in reply to William...

No vitriol, just facts. And Obama had the example of FDR to follow - why didn't he follow it? I have been deeply disappointed in Obama.

JohnH said in reply to pgl...

pgl conveniently forgets my choice words about Bill Clinton, Harry Reid and Nancy Pelosi. What I object to is Democrats who position themselves to sound like FDR and then prosecute a neo-liberal agenda.

Gullible folks like pgl and his coterie believe what these Democrats say and waste our time defending their neoliberal behavior.

[Dec 21, 2015] Monetalism is dead but remains of monetarist thinking are still lingering

Notable quotes:
"... Summers is right that bubbles are usually accompanied by some kind of financial euphoria. ..."
"... There will be massive pushback because so many have wasted many years and resources building mathematically elegant but fatally flawed models that do not make accurate predictions on even represent the fundamentals of any economy. ..."
economistsview.typepad.com
Peter K. said in reply to pgl... December 16, 2015 at 10:07 AM
"It seems to me looking at a year when the stock market has gone down a bit, credit spreads have widened substantially and the dollar has been very strong it is hard to say that now is the time to fire a shot across the bow of financial euphoria. Looking especially at emerging markets I would judge that under-confidence and excessive risk aversion are a greater threat over the next several years than some kind of financial euphoria."

Summers is right that bubbles are usually accompanied by some kind of financial euphoria.

... ... ...

Peter K. said in reply to Benedict@Large...

I disagree with your assessment. People (elite?) are talking about unusual solutions because fiscal policy is being blocked politically.

MMT doesn't seem that different from Keynesianism, except proponents have very big chips on their shoulders for some reason.

Right now the Keynesians are arguing that the Fed shouldn't raise rates. Are the MMTers arguing any differently? Or are they merely giving us the blue prints for utopia. Blue prints don't help much if the politics are against you.

Syaloch said in reply to Peter K....

Great question.

If I have two black boxes that always produce exactly the same outputs, does it matter whether their internal mechanisms are different?

Dan Kervick said in reply to Syaloch...
"Or maybe they would be effective because people believe they ought to be effective."

Possibly. I think back in the 80's when monetarism was the super-sexy new view, there were a lot of people who thought inflation was mainly a function of the monetary base, so if the Fed made a big public stink about pumping up the monetary base, that could be counted on the boost inflation expectations, at least in some quarters, and the high expectations would in turn help to boost actual inflation. That doesn't seem to be the case any longer.

Dan Kervick said in reply to pgl...
The heyday of monetarism was the late 70's and early 80's. That's when Friedman's monetary theory of inflation caught the public imagination, and it's the only time the Fed ever attempted (briefly) to target the money supply.

Conservative spear-carrier Niall Ferguson knows how important monetarism was to the neoliberal movement, and how big a deal it was during the Thatcher-Reagan era.

http://www.niallferguson.com/journalism/finance-economics/friedman-is-dead-monetarism-is-dead-but-what-about-inflation

Other references to the heyday of monetarism abound:

http://www.voxeu.org/article/nominal-gdp-targeting-developing-nations

Dan Kervick said in reply to pgl...
The heyday of monetarism was the late 70's and early 80's. That's when Friedman's monetary theory of inflation caught the public imagination, and it's the only time the Fed ever attempted (briefly) to target the money supply.

Conservative spear-carrier Niall Ferguson knows how important monetarism was to the neoliberal movement, and how big a deal it was during the Thatcher-Reagan era.

http://www.niallferguson.com/journalism/finance-economics/friedman-is-dead-monetarism-is-dead-but-what-about-inflation

Other references to the heyday of monetarism abound:

http://www.voxeu.org/article/nominal-gdp-targeting-developing-nations

bakho said... December 16, 2015 at 05:45 AM
Kevin Hoover, The emperor has no clothes!

"Given what we know about representative-agent models…there is not the slightest reason for us to think that the conditions under which they should work are fulfilled. The claim that representative-agent models provide microfundations succeeds only when we steadfastly avoid the fact that representative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models. They do not solve the problem of aggregation; rather they assume that it can be ignored."

This the reason Macro needs to move into more data driven empirics.

There will be massive pushback because so many have wasted many years and resources building mathematically elegant but fatally flawed models that do not make accurate predictions on even represent the fundamentals of any economy.

Syaloch said... December 16, 2015 at 05:50 AM

The Advantages of Higher Inflation - The New York Times

From the article:

"A critical problem with aiming for higher inflation is how to get from here to there. The Fed has spent enormous effort anchoring people's expectations to 2 percent. Even economists sympathetic to a higher target are wary of what such a shift might do to its credibility.

"'A perfect world, where you could commit to 4 percent and everybody believed it, would be great,' Mr. Mishkin told me. 'We are not in a perfect world. Moving much higher than 2 percent raises the risk that expectations become unanchored.'

"So here is an alternative proposal. If the Fed is too cautious to risk unhinging inflationary expectations, how about just delivering what it has promised? Among economists and investors, the problem with the Fed's 2 percent target is that just about everybody believes it is really a ceiling. That makes it even harder for inflation to rise to that level. The market expects the Fed to act pre-emptively to ensure it never goes over that line - which is what it seems to be doing now.

"If the Fed is not going to aim for higher inflation, the least it could do is re-anchor expectations to the goal it established, allowing inflation to fluctuate above and below a 2 percent average. That alone might help deal with the next economic crisis.

"'We haven't fully tested whether we can deal with this kind of crisis with a 2 percent inflation target,' said David H. Romer of the University of California, Berkeley. 'Central banks have lots of tools. If they say they are willing to keep using them until they get where they want, they can eventually do it.'"

This highlights a confusing aspect of inflation targets. If the Fed simply announces a higher inflation target without taking any other action, have they really done anything? What's more, they not only need to announce the new target, they need to convince markets that they are willing to do whatever it takes to hit that target -- it's all about credibility and re-anchoring expectations. And while engaging in QE to push down longer-term rates might help make that statement more convincing, it doesn't seem to be strictly necessary for the new target to be effective.

Thus inflation targets seem in at least some cases to operate purely through psychological manipulation, as a sort of placebo effect: inflation rises not because the Fed has injected money into the economy today or changed the cost of lending today, but rather because the Fed is able to "trick" markets into believing it will rise in the future.

Peter K. said in reply to Syaloch...

And the reverse is true. The markets are skeptical that the Fed will hit its 2 percent ceiling target any time soon.

Inflation expectations are becoming un-anchored on the downside but nobody cares because .... oil.

Dan Kervick said in reply to Peter K....
I guess we'll all have to wait for Yellen's future memoirs to know the thinking that was going on inside the Fed during 2015. But it's interesting that both Yellen and Stanley Fischer, both formerly held in gigantic respect by the more prominent liberal economists, are now the targets of ire for apparently not seeing eye-to-eye with their opinionated friends on the outside. Despite the fact that BoG members have access to mountains of internal research and policy input that people on the outside can only guess at, the default position of the outsiders is that the insiders have been corrupted by power and fast-talking bankers or something.

Here's my conjecture about what the Fed's thinking is: The Fed recognizes that keeping policy interest rates down at an unprecedentedly low basement level for years on end sends this message to the global economy: the US economy is a sick basket case. It needs the permanent life support of extraordinary monetary policy intervention to be kept from flat-lining.

I think the people who actually work inside the Fed think that is total bunk, and that as they gradually wean the financial sector off of the monetary ventilator, nothing bad is going to happen at all. The patient is going to get up, walk around and breathe normally. And when that happens, it will say, "Wow, maybe I should have tried that earlier!" Business confidence will spurt; people will think, "Hey, I guess we're not in that gloomy post-2008 depression any more!", and the country will get on with its business more cheerfully.

The Fed has had a devil of a time getting back to normal, because despite its best intentions it has inadvertently re-defined a condition of zero rates and excess reserves bleeding from bankers's ears as the new normal, and created an out-of-control public fixation on monetary policy intervention. Fed communications strategies aimed at guiding the market have turned back on them in a reflexive and self-defeating cycle. They got themselves into a terrible pattern for a while where every time there was good economic news, the markets would respond negatively because they interpreted the good news as evidence that the Fed would "taper" - which they regarded as bad news! And if there was bad news, the markets would respond favorably because they saw the bad news as evidence that the fed would "remain aggressive" - which is good news! Obviously that's a pretty pathological cycle to be in: it's a mechanism fro economic self-stultification. Indicating a move toward normalization too suddenly in 2013 caused the irrational "taper tantrum", so they have had to go more slowly this time around with the hand-holding and by building a longer "guidance" runway.

Their chief need now is to push back against the monetary maniacs and hyperventilators who keep trying to convince impressionable business people and consumers that the Fed has somehow been "keeping the economy" afloat, and that when interest rates go up - from 1/4 to 1/2 of a percent! - we're all going to drown. If you have enough ambulance chasers convincing people they are sick and damaged, they will act sick and damaged.

[Dec 20, 2015] Paul Krugman: The Big Short, Housing Bubbles and Retold Lies

Notable quotes:
"... I get the feeling that if doing a film review of The Force Awakens , most economists would be rooting for the Empire to win - after all the empire will bring free trade within its borders, like the EU. ..."
"... In market fundamentalist world, markets dont fail. They can only be failed. Though its still not clear how they think a little bit of government incentive for loans to low income borrowers caused the entire financial sector to lose its mind wrt CDOs. ..."
"... The distribution of the use of credit between pure financial speculation and productive investment is not a function of interest rates, but of things like bank culture, bank regulation and macro-economic and technological prospects. ..."
"... ....Supervising regulators need to look carefully at the ratio of credit used for financial trading compared to credit used for what weve called real-economy matters. They should adjust the level of monitoring based on this view while they also inform policy makers including those in the legislature. ..."
"... except that a significant chunk of institutional investors have sticky nominal targets for return thanks to the politics of return expectation setting (true for pension fund and endowments) -- low interest rates do encourage chasing phantoms or looking to extract some rents, for those subject to that kind of pressure ..."
"... The relationship between low interest rates and bubbles has nothing to do with the above. Low interest rates RAISE asset prices. Through the magic of low discount rates, the future earnings and cash flows are worth a lot higher today. This is why Bernanke cut rates and kept them low. Raising asset prices and the resultant higher net worth was supposed to lead to higher spending today. But outsized returns also attracts speculation. what is so difficult to understand? John Williams of SF Fed has shown how positive returns in asset markets raises the speculators expected returns. when this dynamic gets out of control, it is a bubble. ..."
"... Yes, indeed. And who do we have to blame for that? Obama and Holder, of course. They made the investigation of mortgage securities fraud DOJs lowest priority. Krugmans Democratic proclivities prevent him from stating the obvious. ..."
"... Fact is, Obama has intentionally been a lame duck ever since he took office. He was even clueless on how to capitalize on a filibuster-proof majority in the midst of an economic crisis...which brings us to Trump. Many are so desperate for leadership after Obamas hollow presidency that theyll even support a racist demagogue to avoid another empty White House. ..."
"... Yes you are correct. From 2001 into 2008 when all of the liar and ninja loans were being made, not one government official stepped forward to investigate the possibility of fraud, the predatory lending, the misrepresentation of loans taking place, the loans with teaser rates which later ballooned, the packing of loans with deceptive fees, the illegal kick backs, etc. Not one. To make matters worst, the administration from 2001-2008 aligned itself with the banks along with the maestro hisself Greenspan. ..."
"... When state AGs took on the burden of investigating the flagrant violations, the administration moves to block them saying they had no jurisdiction to do so. It did this through the OCC issuing rules preventing the states from prosecuting the banks. Besides blocking any investigation, the OCC failed in its mission to audit the banks for which it was by law to do. ..."
economistsview.typepad.com

Why are Murdoch-controlled newspapers attacking "The Big Short?"

'The Big Short,' Housing Bubbles and Retold Lies, by Paul krugman, Commentary, NY Times: In May 2009 Congress created a special commission to examine the causes of the financial crisis. The idea was to emulate the celebrated Pecora Commission of the 1930s, which used careful historical analysis to help craft regulations that gave America two generations of financial stability.

But some members of the new commission had a different goal. ... Peter Wallison of the American Enterprise Institute, wrote to a fellow Republican on the commission ... it was important that what they said "not undermine the ability of the new House G.O.P. to modify or repeal Dodd-Frank"...; the party line, literally, required telling stories that would help Wall Street do it all over again.

Which brings me to a new movie the enemies of financial regulation really, really don't want you to see.

"The Big Short" ... does a terrific job of making Wall Street skulduggery entertaining, of exploiting the inherent black humor of how it went down. ... But you don't want me to play film critic; you want to know whether the movie got the underlying ... story right. And the answer is yes, in all the ways that matter. ...

The ...housing ... bubble ... was inflated largely via opaque financial schemes that in many cases amounted to outright fraud - and it is an outrage that basically nobody ended up being punished ... aside from innocent bystanders, namely the millions of workers who lost their jobs and the millions of families that lost their homes.

While the movie gets the essentials of the financial crisis right, the true story ... is deeply inconvenient to some very rich and powerful people. They and their intellectual hired guns have therefore spent years disseminating an alternative view ... that places all the blame ... on ... too much government, especially government-sponsored agencies supposedly pushing too many loans on the poor.

Never mind that the supposed evidence for this view has been thoroughly debunked..., constant repetition, especially in captive media, keeps this imaginary history in circulation no matter how often it is shown to be false.

Sure enough, "The Big Short" has already been the subject of vitriolic attacks in Murdoch-controlled newspapers...

The ... people who made "The Big Short" should consider the attacks a kind of compliment: The attackers obviously worry that the film is entertaining enough that it will expose a large audience to the truth. Let's hope that their fears are justified.

btg said in reply to pgl...

I get the feeling that if doing a film review of "The Force Awakens", most economists would be rooting for the Empire to win - after all the empire will bring free trade within its borders, like the EU. Krugman would not, however.

Sanjait said...

In market fundamentalist world, markets don't fail. They can only be failed. Though it's still not clear how they think a little bit of government incentive for loans to low income borrowers caused the entire financial sector to lose its mind wrt CDOs.

Are markets efficient or not? I feel like the fundiesndont really have a coherent explanation for what happened, other than insisting the government somehow did it.

reason said...

I wish Krugman would attack the view that is being propagated at the moment that low nominal interest rates (it seems irrespective of the reason for them) foster bubbles. It doesn't make the slightest bit of sense - leverage doesn't just magnify the gains, it magnifies the losses as well - what really counts is expectations regardless of nominal interest rates.)

The distribution of the use of credit between pure financial speculation and productive investment is not a function of interest rates, but of things like bank culture, bank regulation and macro-economic and technological prospects.

reason said... December 18, 2015 at 02:32 AM

It always seem to me that right wing economists credit businessmen with superhuman foresight and sophistication, except when it comes to the actions of the Fed and then something addles their brains and they become completely stupid. As I once put, it seems investors can't understand what the Fed is doing, even though they tell you.

Sanjait said in reply to reason... December 18, 2015 at 08:06 AM

That's it exactly. Markets are efficient, unless the government does anything, and then markets lose their minds and it's the government's fault.

And somehow the RW economists see no problem with this model

DeDude said in reply to Sanjait... December 18, 2015 at 08:18 AM

Here is how they evaluate models:

Good model; one that reaches the "right" good conclusions. Bad model; one that ends up saying stuff nobody should believe in.

likbez said in reply to Sanjait...

"Markets are efficient, unless the government does anything"

This is a dangerous neoliberal dogma. Total lie.

=== quote ===
The efficient market hypothesis (EMH) is a flavor of economic Lysenkoism which became popular for the last 30 years in the USA. It is a pseudo scientific theory or, in more politically correct terms, unrealistic idealization of market behavior. Like classic Lysenkoism in the past was supported by Stalin's totalitarian state, it was supported by the power of neoliberal state, which is the state captured by financial oligarchy (see Casino Capitalism and Quiet coup for more details).

Among the factors ignored by EMH is the positive feedback loop inherent in any system based on factional reserve banking, the level of market players ignorance, unequal access to the real information about the markets, the level of brainwashing performed on "lemmings" by controlled by elite MSM and market manipulation by the largest players and the state.

Economics, it is said, is the study of scarcity. There is, however, one thing that certainly isn't scarce, but which deserves the attention of economists - ignorance.
...Conventional economics analyses how individuals choose - maybe rationally, maybe not - from a range of options. But this raises the question: how do they know what these options are? Many feasible - even optimum - options might not occur to them. This fact has some important implications. ...
Slightly simplifying, we can say that (financial) markets are mainly efficient in separation of fools and their money... And efficient market hypothesis mostly bypasses important question about how the inequity of resources which inevitably affects the outcomes of market participants. For example, the level of education of market players is one aspect of the inequity of resources. Herd behavior is another important, but overlooked in EMH factor.

http://www.softpanorama.org/Skeptics/Financial_skeptic/Casino_capitalism/Pseudo_theories/Permanent_equilibrium_fallacy/Efficient_market_hypothesys/index.shtml

JF said in reply to reason...

Great comment. I especially liked this point: "The distribution of the use of credit between pure financial speculation and productive investment is not a function of"

....Supervising regulators need to look carefully at the ratio of credit used for financial trading compared to credit used for what we've called real-economy matters. They should adjust the level of monitoring based on this view while they also inform policy makers including those in the legislature.

There may be an opportunity in 2017 to revise the statutes so the public plainly says what the rules of Commerce are in these financial 'inter-mediation' areas - society is better served if more of such credit offerings go to investments in the real economy where inputs are real things like employees, supplies, equipment/technologies. The public's law can effect this change.

david said in reply to JF...

except that a significant chunk of institutional investors have sticky nominal targets for return thanks to the politics of return expectation setting (true for pension fund and endowments) -- low interest rates do encourage chasing phantoms or looking to extract some rents, for those subject to that kind of pressure

BenIsNotYoda said in reply to reason...

"The distribution of the use of credit between pure financial speculation and productive investment is not a function of interest rates, but of things like bank culture, bank regulation and macro-economic and technological prospects."

The relationship between low interest rates and bubbles has nothing to do with the above. Low interest rates RAISE asset prices. Through the magic of low discount rates, the future earnings and cash flows are worth a lot higher today. This is why Bernanke cut rates and kept them low. Raising asset prices and the resultant higher net worth was supposed to lead to higher spending today. But outsized returns also attracts speculation. what is so difficult to understand? John Williams of SF Fed has shown how positive returns in asset markets raises the speculator's expected returns. when this dynamic gets out of control, it is a bubble.

Sanjait said in reply to BenIsNotYoda...

It's hard to see how to your claim that expected returns are high when earnings yields across the board are historically low.

BenIsNotYoda said in reply to Sanjait...

That is exactly the point. Expected returns in stocks have nothing to do with earnings growth.

http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2013/september/asset-price-bubbles-tomorrow-yesterday-never-today/

Fred C. Dobbs said in reply to reason...

It does not seem reasonable or fair to pay practically no interest on savings, which is a consequence of Fed policy. A consequence of this is that people go into risky investments that lead to catastrophe, sometimes widespread. If the goal was to get people to spend (i.e. consume) more, it seems that they are persistently & stubbornly frugal.

anne, December 18, 2015 at 06:37 AM

http://krugman.blogs.nytimes.com/2015/11/23/shorts-subject/

November 23, 2015

Shorts Subject
By Paul Krugman

Last night I was invited to a screening of "The Big Short," which I thought was terrific; who knew that collateralized debt obligations and credit default swaps could be made into an edge-of-your-seat narrative (with great acting)?

But there was one shortcut the narrative took, which was understandable and possibly necessary, but still worth noting.

In the film, various eccentrics and oddballs make the discovery that subprime-backed securities are garbage, which is pretty much what happened; but this is wrapped together with their realization that there was a massive housing bubble, which is presented as equally contrary to anything anyone respectable was saying. And that's not quite right.

It's true that Greenspan and others were busy denying the very possibility of a housing bubble. And it's also true that anyone suggesting that such a bubble existed was attacked furiously - "You're only saying that because you hate Bush!" Still, there were a number of economic analysts making the case for a massive bubble. Here's Dean Baker in 2002. * Bill McBride (Calculated Risk) was on the case early and very effectively. I keyed off Baker and McBride, arguing for a bubble in 2004 and making my big statement about the analytics in 2005, ** that is, if anything a bit earlier than most of the events in the film. I'm still fairly proud of that piece, by the way, because I think I got it very right by emphasizing the importance of breaking apart regional trends.

So the bubble itself was something number crunchers could see without delving into the details of mortgage-backed securities, traveling around Florida, or any of the other drama shown in the film. In fact, I'd say that the housing bubble of the mid-2000s was the most obvious thing I've ever seen, and that the refusal of so many people to acknowledge the possibility was a dramatic illustration of motivated reasoning at work.

The financial superstructure built on the bubble was something else; I was clueless about that, and didn't see the financial crisis coming at all.

* http://www.cepr.net/documents/publications/housing_2002_08.pdf

** http://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html

anne said in reply to anne... December 18, 2015 at 06:43 AM

http://www.nytimes.com/2002/08/16/opinion/mind-the-gap.html

August 16, 2002

Mind the Gap
By PAUL KRUGMAN

More and more people are using the B-word about the housing market. A recent analysis * by Dean Baker, of the Center for Economic Policy Research, makes a particularly compelling case for a housing bubble. House prices have run well ahead of rents, suggesting that people are now buying houses for speculation rather than merely for shelter. And the explanations one hears for those high prices sound more and more like the rationalizations one heard for Nasdaq 5,000.

If we do have a housing bubble, and it bursts, we'll be looking a lot too Japanese for comfort....

* http://www.cepr.net/documents/publications/housing_2002_08.pdf

anne said in reply to anne... December 18, 2015 at 06:44 AM

http://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html

August 8, 2005

That Hissing Sound
By PAUL KRUGMAN

This is the way the bubble ends: not with a pop, but with a hiss.

Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.

So the news that the U.S. housing bubble is over won't come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.

Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble....

EMichael said in reply to anne... December 18, 2015 at 06:59 AM

Yeah, the only thing he missed was the timing of the collapse. The day he wrote this the Fed had already raised rates 250% in one year, on the way to a total of 400% in the next 6 months.

Yet prices accelerated until the top was reached a year after the column.

anne said in reply to EMichael... December 18, 2015 at 07:43 AM

http://www.nytimes.com/2006/08/25/opinion/25krugman.html

August 25, 2006

Housing Gets Ugly
By PAUL KRUGMAN

Bubble, bubble, Toll's in trouble. This week, Toll Brothers, the nation's premier builder of McMansions, announced that sales were way off, profits were down, and the company was walking away from already-purchased options on land for future development.

Toll's announcement was one of many indications that the long-feared housing bust has arrived. Home sales are down sharply; home prices, which rose 57 percent over the past five years (and much more than that along the coasts), are now falling in much of the country. The inventory of unsold existing homes is at a 13-year high; builders' confidence is at a 15-year low.

A year ago, Robert Toll, who runs Toll Brothers, was euphoric about the housing boom, declaring: "We've got the supply, and the market has got the demand. So it's a match made in heaven." In a New York Times profile of his company published last October, he dismissed worries about a possible bust. "Why can't real estate just have a boom like every other industry?" he asked. "Why do we have to have a bubble and then a pop?"

The current downturn, Mr. Toll now says, is unlike anything he's seen: sales are slumping despite the absence of any "macroeconomic nasty condition" taking housing down along with the rest of the economy. He suggests that unease about the direction of the country and the war in Iraq is undermining confidence. All I have to say is: pop! ...

EMichael said in reply to anne... December 18, 2015 at 07:52 AM

"Mr. Toll now says, is unlike anything he's seen: sales are slumping despite the absence of any "macroeconomic nasty condition""

You gotta love builders and RE agents. It wasn't macro that caused it, it was default rates across the board on supposedly safe investments that caused mortgage money supply to totally disappear.

One day people will understand that payments are the key to all finance.

JohnH said...

"and it is an outrage that basically nobody ended up being punished ."

Yes, indeed. And who do we have to blame for that? Obama and Holder, of course. They made the investigation of mortgage securities fraud DOJ's lowest priority. Krugman's Democratic proclivities prevent him from stating the obvious.

I' m sure that pgl and his band of merry Obamabots will try to spin this in Obama's favor...I.e. Congress prevented him from implementing the law, even though Congress has nothing to do with it.

Fact is, Obama has intentionally been a lame duck ever since he took office. He was even clueless on how to capitalize on a filibuster-proof majority in the midst of an economic crisis...which brings us to Trump. Many are so desperate for leadership after Obama's hollow presidency that they'll even support a racist demagogue to avoid another empty White House.

run75441 said in reply to JohnH...

Yes you are correct. From 2001 into 2008 when all of the liar and ninja loans were being made, not one government official stepped forward to investigate the possibility of fraud, the predatory lending, the misrepresentation of loans taking place, the loans with "teaser" rates which later ballooned, the packing of loans with deceptive fees, the illegal kick backs, etc. Not one. To make matters worst, the administration from 2001-2008 aligned itself with the banks along with the maestro hisself "Greenspan."

When state AGs took on the burden of investigating the flagrant violations, the administration moves to block them saying they had no jurisdiction to do so. It did this through the OCC issuing rules preventing the states from prosecuting the banks. Besides blocking any investigation, the OCC failed in its mission to audit the banks for which it was by law to do.

What was the SEC doing during this time period? What was the administration doing with Enron in 2002? Didn't Cheney get sued by the GAO to find out who he was talking to at Enron?

Yes there is the matter of not prosecuting banking execs after 2008; however, the issue was allowed to grow during the prior administration and left on the next administration's doorstep. Closing the barn door after the perps have escaped is a bit late and it should have been stopped dead in its tracks during the prior 8 years.

So keep going down that path and we can also talk about fraud with tranching, CDS, Naked CDs, reserves, etc.

So, where was the administration during this time period?

DeDude said...

Subprime loans in poor communities represented a very small fraction of the total subprime volume and defaulted loans. I mean talk about the mouse and the elephant. Yet the FoxBots are being convinced to look at those scary mice and all that thundering noise they are making.

Alex H said in reply to Peter K....
In the book, one of the supposed villains went to the division of AIG that was selling CDSes (i.e. "insuring" the toxic crap) and explained to a direct subordinate of the division exactly how his bank and the other companies of Wall Street were suckering them into taking on absurd risks. In *2005*.

Because he was massively short in this market, and AIG pulling the plug would have popped the bubble. Nobody else was selling CDSes (then), and Wall Street couldn't have pretended that their risks were covered without them. That doesn't make him a hero, but seriously, if AIG had listened, no collapse.

Several of the characters effectively called up the ratings agencies to shout at them. Others called NYT and WSJ reporters, who ignored them. Then they called the SEC's enforcement division, who ignored them.

Besides, if the other side in all of those bets were foreign "widows and orphans", then it wouldn't have wrecked the financial system. If Bear Stearns had been sitting as the middleman between a Korean pension fund and Steve Eisman, they'd have just taken their cut and moved on.

[Dec 19, 2015] The Enduring Relevance of "Manias, Panics, and Crashes"

Notable quotes:
"... Manias, Panics, and Crashes ..."
"... The New International Money Game ..."
"... Manias, Panics and Crashes ..."
"... Why Minsky Matters ..."
"... Manias, Panics and Crashes ..."
"... Manias, Panics and Crashes ..."
December 17, 2015 | Angry Bear

by Joseph Joyce

The Enduring Relevance of "Manias, Panics, and Crashes"

The seventh edition of Manias, Panics, and Crashes has recently been published by Palgrave Macmillan. Charles Kindleberger of MIT wrote the first edition, which appeared in 1978, and followed it with three more editions. Robert Aliber of the Booth School of Business at the University of Chicago took over the editing and rewriting of the fifth edition, which came out in 2005. (Aliber is also the author of another well-known book on international finance, The New International Money Game.) The continuing popularity of Manias, Panics and Crashes shows that financial crises continue to be a matter of widespread concern.

Kindleberger built upon the work of Hyman Minsky, a faculty member at Washington University in St. Louis. Minsky was a proponent of what he called the "financial instability hypothesis," which posited that financial markets are inherently unstable. Periods of financial booms are followed by busts, and governmental intervention can delay but not eliminate crises. Minsky's work received a great deal of attention during the global financial crisis (see here and here; for a summary of Minksy's work, see Why Minsky Matters by L. Randall Wray of the University of Missouri-Kansas City and the Levy Economics Institute).

Kindleberger provided a more detailed description of the stages of a financial crisis. The period preceding a crisis begins with a "displacement," a shock to the system. When a displacement improves the profitability of at least one sector of an economy, firms and individuals will seek to take advantage of this opportunity. The resulting demand for financial assets leads to an increase in their prices. Positive feedback in asset markets lead to more investments and financial speculation, and a period of "euphoria," or mania develops.

At some point, however, insiders begin to take profits and withdraw from the markets. Once market participants realize that prices have peaked, flight from the markets becomes widespread. As prices plummet, a period of "revulsion" or panic ensues. Those who had financed their positions in the market by borrowing on the promise of profits on the purchased assets become insolvent. The panic ends when prices fall so far that some traders are tempted to come back into the market, or trading is limited by the authorities, or a lender of last resort intervenes to halt the decline.

In addition to elaborating on the stages of a financial crisis, Kindleberger also placed them in an international context. He wrote about the propagation of crises through the arbitrage of divergences in the prices of assets across markets or their substitutes. Capital flows and the spread of euphoria also contribute to the simultaneous rises in asset prices in different countries. (Piero Pasotti and Alessandro Vercelli of the University of Siena provide an analysis of Kindleberger's contributions.)

Aliber has continued to update the book, and the new edition has a chapter on the European sovereign debt crisis. (The prior edition covered the events of 2008-09.) But he has also made his own contributions to the Minsky-Kindleberger (and now –Aliber) framework. Aliber characterizes the decades since the early 1980s as "…the most tumultuous in monetary history in terms of the number, scope and severity of banking crises." To date, there have been four waves of such crises, which are almost always accompanied by currency crises. The first wave was the debt crisis of developing nations during the 1980s, and it was followed by a second wave of crises in Japan and the Nordic countries in the early 1990s. The third wave was the Asian financial crisis of 1997-98, and the fourth is the global financial crisis.

Aliber emphasizes the role of cross-border investment flows in precipitating the crises. Their volatility has risen under flexible exchange rates, which allow central banks more freedom in formulating monetary policies that influence capital allocation. He also draws attention to the increases in household wealth due to rising asset prices and currency appreciation that contribute to consumption expenditures and amplify the boom periods. The reversal in wealth once investors revise their expectations and capital begins to flow out makes the resulting downturn more acute.

These views are consistent in many ways with those of Claudio Borio of the Bank for International Settlements (see also here). He has written that the international monetary and financial system amplifies the "excess financial elasticity," i.e., the buildup of financial imbalances that characterizes domestic financial markets. He identifies two channels of transmission. First, capital inflows contribute to the rise in domestic credit during a financial boom. The impact of global conditions on domestic financial markets exacerbates this development (see here). Second, monetary regimes may facilitate the expansion of monetary conditions from one country to others. Central bankers concerned about currency appreciation and a loss of competitiveness keep interest rates lower than they would otherwise, which furthers a domestic boom. In addition, the actions of central banks with international currencies such as the dollar has international ramifications, as the current widespread concern about the impending rise in the Federal Funds rate shows.

Aliber ends the current edition of Manias, Panics and Crashes with an appendix on China's financial situation. He compares the surge in China's housing markets with the Japanese boom of the 1980s and subsequent bust that initiated decades of slow economic growth. An oversupply of new housing in China has resulted in a decline in prices that threatens the solvency of property developers and the banks and shadow banks that financed them. Aliber is dubious of the claim that the Chinese government will support the banks, pointing out that such support will only worsen China's indebtedness. The need for an eighth edition of Manias, Panics and Crashes may soon be apparent.

cross posted with Capital Ebbs and Flows

[Dec 19, 2015] The Washington Post's Non-Political Fed Looks a Lot Like Wall Street's Fed

Notable quotes:
"... Any serious discussion of Fed policy would note that the banking industry appears to have a grossly disproportionate say in the country's monetary policy. ..."
Dec 19, 2015 | Beat the Press

... ... ...

But what is even more striking is the Post's ability to treat the Fed a neutral party when the evidence is so overwhelming in the opposite direction. The majority of the Fed's 12 district bank presidents have long been pushing for a rate hike. While there are some doves among this group, most notably Charles Evans, the Chicago bank president, and Narayana Kocherlakota, the departing president of the Minneapolis bank, most of this group has publicly pushed for higher rate hikes for some time. By contrast, the governors who are appointed through the democratic process, have been far more cautious about raising rates.

It should raise serious concerns that the bank presidents, who are appointed through a process dominated by the banking industry, has such a different perspective on the best path forward for monetary policy. With only five of the seven governor slots currently filled, there are as many presidents with voting seats on the Fed's Open Market Committee as governors. In total, the governors are outnumbered at meetings by a ratio of twelve to five.

Any serious discussion of Fed policy would note that the banking industry appears to have a grossly disproportionate say in the country's monetary policy. Furthermore, it seems determined to use that influence to push the Fed on a path that slows growth and reduces the rate of job creation. The Post somehow missed this story or at least would prefer that the rest of us not take notice.

* https://www.washingtonpost.com/opinions/the-federal-reserve-makes-a-good-judgment-call-in-raising-interest-rates/2015/12/18/7954e1c6-a4f8-11e5-ad3f-991ce3374e23_story.html

-- Dean Baker

[Dec 18, 2015] The Upward Redistribution of Income: Are Rents the Story?

Looks like growth of financial sector represents direct threat to the society
Notable quotes:
"... Perhaps the financialization of the economy and rising inequality leads to a corruption of the political process which leads to monetary, currency and fiscal policy such that labor markets are loose and inflation is low. ..."
"... Growth of the non-financial-sector == growth in productivity ..."
"... In complex subject matters, even the most competent person joining a company has to become familiar with the details of the products, the industry niche, the processes and professional/personal relationships in the company or industry, etc. All these are not really teachable and require between months and years in the job. This represents a significant sunk cost. Sometimes (actually rather often) experience within the niche/industry is in a degree portable between companies, but some company still had to employ enough people to build this experience, and it cannot be readily bought by bringing in however competent freshers. ..."
December 18, 2015 | cepr.netDean Baker:
Working Paper: : In the years since 1980, there has been a well-documented upward redistribution of income. While there are some differences by methodology and the precise years chosen, the top one percent of households have seen their income share roughly double from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period.

This paper argues that the bulk of this upward redistribution comes from the growth of rents in the economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals. The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise in inequality, as for example argued by Thomas Piketty.

Flash | PDF

RC AKA Darryl, Ron said in reply to Fair Economist, December 18, 2015 at 11:34 AM

"...the growth of finance capitalism was what would kill capitalism off..."

"Financialization" is a short-cut terminology that in full is term either "financialization of non-financial firms" or "financialization of the means of production." In either case it leads to consolidation of firms, outsourcing, downsizing, and offshoring to reduce work force and wages and increase rents.

Consolidation, the alpha and omega of financialization can only be executed with very liquid financial markets, big investment banks to back necessary leverage to make the proffers, and an acute capital gains tax preference relative to dividends and interest earnings, the grease to liquidity.

It takes big finance to do "financialization" and it takes "financialization" to extract big rents while maintaining low wages.

RC AKA Darryl, Ron said in reply to RC AKA Darryl, Ron, December 18, 2015 at 11:42 AM
[THANKS to djb just down thread who supplied this link:]

http://www.democraticunderground.com/10021305040

Finance sector as percent of US GDP, 1860-present: the growth of the rentier economy

[graph]

Financialization is a term sometimes used in discussions of financial capitalism which developed over recent decades, in which financial leverage tended to override capital (equity) and financial markets tended to dominate over the traditional industrial economy and agricultural economics.

Financialization is a term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument... Financialization also makes economic rents possible...financial leverage tended to override capital (equity) and financial markets tended to dominate over the traditional industrial economy and agricultural economics...

Companies are not able to invest in new physical capital equipment or buildings because they are obliged to use their operating revenue to pay their bankers and bondholders, as well as junk-bond holders. This is what I mean when I say that the economy is becoming financialized. Its aim is not to provide tangible capital formation or rising living standards, but to generate interest, financial fees for underwriting mergers and acquisitions, and capital gains that accrue mainly to insiders, headed by upper management and large financial institutions. The upshot is that the traditional business cycle has been overshadowed by a secular increase in debt.

Instead of labor earning more, hourly earnings have declined in real terms. There has been a drop in net disposable income after paying taxes and withholding "forced saving" for social Security and medical insurance, pension-fund contributions and–most serious of all–debt service on credit cards, bank loans, mortgage loans, student loans, auto loans, home insurance premiums, life insurance, private medical insurance and other FIRE-sector charges. ... This diverts spending away from goods and services.

In the United States, probably more money has been made through the appreciation of real estate than in any other way. What are the long-term consequences if an increasing percentage of savings and wealth, as it now seems, is used to inflate the prices of already existing assets - real estate and stocks - instead of to create new production and innovation?

http://en.wikipedia.org/wiki/Financialization

pgl said in reply to RC AKA Darryl, Ron, December 18, 2015 at 03:25 PM
Your graph shows something I've been meaning to suggest for a while. Take a look at the last time that the financial sector share of GDP rose. The late 1920's. Which was followed by the Great Depression which has similar causes as our Great Recession. Here is my observation.

Give that Wall Street clowns a huge increase in our national income and we don't get more services from them. What we get is screwed on the grandest of scales.

BTW - there is a simple causal relationship that explains both the rise in the share of financial sector income/GDP and the massive collapses of the economy (1929 and 2007). It is called stupid financial deregulation. First we see the megabanks and Wall Street milking the system for all its worth and when their unhanded and often secretive risk taking falls apart - the rest of bear the brunt of the damage.

Which is why this election is crucial. Elect a Republican and we repeat this mistake again. Elect a real progressive and we can put in place the types of financial reforms FDR was known for.

Peter K. said in reply to RC AKA Darryl, Ron, December 18, 2015 at 11:50 AM

" and it takes "financialization" to extract big rents while maintaining low wages."

It takes governmental macro policy to maintain loose labor markets and low wages. Perhaps the financialization of the economy and rising inequality leads to a corruption of the political process which leads to monetary, currency and fiscal policy such that labor markets are loose and inflation is low.

djb said...

http://www.democraticunderground.com/10021305040

I don't know about the last couple years but this chart indicates a large growth in financials as a share of gdp over the years since the 40's

RC AKA Darryl, Ron said in reply to djb, December 18, 2015 at 12:03 PM
[Anne gave you FIRE sector profits as a share of GDP while this gives FIRE sector profits as a share of total corporate profits.]

*

[Smoking gun excerpt:]

"...The financial system has grown rapidly since the early 1980s. In the 1950s, the financial sector accounted for about 3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5 percent. The sector's yearly rate of growth doubled after 1980, rising to a peak of 7.5 percent of GDP in 2006. As finance has grown in relative size it has also grown disproportionately more profitable. In 1950, financial-sector profits were about 8 percent of overall U.S. profits-meaning all the profit earned by any kind of business enterprise in the country. By the 2000s, they ranged between 20 and 40 percent...

[Ouch!]

[Now the whole enchilada:]

http://www.washingtonmonthly.com/magazine/novemberdecember_2014/features/frenzied_financialization052714.php?page=all

If you want to know what happened to economic equality in this country, one word will explain a lot of it: financialization. That term refers to an increase in the size, scope, and power of the financial sector-the people and firms that manage money and underwrite stocks, bonds, derivatives, and other securities-relative to the rest of the economy.

The financialization revolution over the past thirty-five years has moved us toward greater inequality in three distinct ways. The first involves moving a larger share of the total national wealth into the hands of the financial sector. The second involves concentrating on activities that are of questionable value, or even detrimental to the economy as a whole. And finally, finance has increased inequality by convincing corporate executives and asset managers that corporations must be judged not by the quality of their products and workforce but by one thing only: immediate income paid to shareholders.

The financial system has grown rapidly since the early 1980s. In the 1950s, the financial sector accounted for about 3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5 percent. The sector's yearly rate of growth doubled after 1980, rising to a peak of 7.5 percent of GDP in 2006. As finance has grown in relative size it has also grown disproportionately more profitable. In 1950, financial-sector profits were about 8 percent of overall U.S. profits-meaning all the profit earned by any kind of business enterprise in the country. By the 2000s, they ranged between 20 and 40 percent. This isn't just the decline of profits in other industries, either. Between 1980 and 2006, while GDP increased five times, financial-sector profits increased sixteen times over. While financial and nonfinancial profits grew at roughly the same rate before 1980, between 1980 and 2006 nonfinancial profits grew seven times while financial profits grew sixteen times.

This trend has continued even after the financial crisis of 2008 and subsequent financial reforms, including the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Financial profits in 2012 were 24 percent of total profits, while the financial sector's share of GDP was 6.8 percent. These numbers are lower than the high points of the mid-2000s; but, compared to the years before 1980, they are remarkably high.

This explosion of finance has generated greater inequality. To begin with, the share of the total workforce employed in the financial sector has barely budged, much less grown at a rate equivalent to the size and profitability of the sector as a whole. That means that these swollen profits are flowing to a small sliver of the population: those employed in finance. And financiers, in turn, have become substantially more prominent among the top 1 percent. Recent work by the economists Jon Bakija, Adam Cole, and Bradley T. Heim found that the percentage of those in the top 1 percent of income working in finance nearly doubled between 1979 and 2005, from 7.7 percent to 13.9 percent.

If the economy had become far more productive as a result of these changes, they could have been worthwhile. But the evidence shows it did not. Economist Thomas Philippon found that financial services themselves have become less, not more, efficient over this time period. The unit cost of financial services, or the percentage of assets it costs to produce all financial issuances, was relatively high at the dawn of the twentieth century, but declined to below 2 percent between 1901 and 1960. However, it has increased since the 1960s, and is back to levels seen at the early twentieth century. Whatever finance is doing, it isn't doing it more cheaply.

In fact, the second damaging trend is that financial institutions began to concentrate more and more on activities that are worrisome at best and destructive at worst. Harvard Business School professors Robin Greenwood and David Scharfstein argue that between 1980 and 2007 the growth in financial-industry revenues came from two things: asset management and loan origination. Fees associated either with asset management or with household credit in particular were responsible for 74 percent of the growth in financial-sector output over that period.

The asset management portion reflects the explosion of mutual funds, which increased from $134 billion in assets in 1980 to $12 trillion in 2007. Much of it also comes from "alternative investment vehicles" like hedge funds and private equity. Over this time, the fee rate for mutual funds fell, but fees associated with alternative investment vehicles exploded. This is, in essence, money for nothing-there is little evidence that hedge funds actually perform better than the market over time. And, unlike mutual funds, alternative investment funds do not fully disclose their practices and fees publicly.

Beginning in 1980 and continuing today, banks generate less and less of their income from interest on loans. Instead, they rely on fees, from either consumers or borrowers. Fees associated with household credit grew from 1.1 percent of GDP in 1980 to 3.4 percent in 2007. As part of the unregulated shadow banking sector that took over the financial sector, banks are less and less in the business of holding loans and more and more concerned with packaging them and selling them off. Instead of holding loans on their books, banks originate loans to sell off and distribute into this new type of banking sector.

Again, if this "originate-to-distribute" model created value for society, it could be a worthwhile practice. But, in fact, this model introduced huge opportunities for fraud throughout the lending process. Loans-such as "securitized mortgages" made up of pledges of the income stream from subprime mortgage loans-were passed along a chain of buyers until someone far away held the ultimate risk. Bankers who originated the mortgages received significant commissions, with virtually no accountability or oversight. The incentive, in fact, was perverse: find the worst loans with the biggest fees instead of properly screening for whether the loans would be any good for investors.

The same model made it difficult, if not impossible, to renegotiate bad mortgages when the system collapsed. Those tasked with tackling bad mortgages on behalf of investors had their own conflicts of interests, and found themselves profiting while loans struggled. This process created bad debts that could never be paid, and blocked attempts to try and rework them after the fact. The resulting pool of bad debt has been a drag on the economy ever since, giving us the fall in median wages of the Great Recession and the sluggish recovery we still live with.

And of course it's been an epic disaster for the borrowers themselves. Many of them, we now know, were moderate- and lower-income families who were in no financial position to borrow as much as they did, especially under such predatory terms and with such high fees. Collapsing home prices and the inability to renegotiate their underwater mortgages stripped these folks of whatever savings they had and left them in deep debt, widening even further the gulf of inequality in this country.

Moreover, financialization isn't just confined to the financial sector itself. It's also ultimately about who controls, guides, and benefits from our economy as a whole. And here's the last big change: the "shareholder revolution," started in the 1980s and continuing to this very day, has fundamentally transformed the way our economy functions in favor of wealth owners.

To understand this change, compare two eras at General Electric. This is how business professor Gerald Davis describes the perspective of Owen Young, who was CEO of GE almost straight through from 1922 to 1945: "[S]tockholders are confined to a maximum return equivalent to a risk premium. The remaining profit stays in the enterprise, is paid out in higher wages, or is passed on to the customer." Davis contrasts that ethos with that of Jack Welch, CEO from 1981 to 2001; Welch, Davis says, believed in "the shareholder as king-the residual claimant, entitled to the [whole] pot of earnings."

This change had dramatic consequences. Economist J. W. Mason found that, before the 1980s, firms tended to borrow funds in order to fuel investment. Since 1980, that link has been broken. Now when firms borrow, they tend to use the money to fund dividends or buy back stocks. Indeed, even during the height of the housing boom, Mason notes, "corporations were paying out more than 100 percent of their cash flow to shareholders."

This lack of investment is obviously holding back our recovery. Productive investment remains low, and even extraordinary action by the Federal Reserve to make investments more profitable by keeping interest rates low has not been able to counteract the general corporate presumption that this money should go to shareholders. There is thus less innovation, less risk taking, and ultimately less growth. One of the reasons this revolution was engineered in the 1980s was to put a check on what kinds of investments CEOs could make, and one of those investments was wage growth. Finance has now won the battle against wage earners: corporations today are reluctant to raise wages even as the economy slowly starts to recover. This keeps the economy perpetually sluggish by retarding consumer demand, while also increasing inequality.

How can these changes be challenged? The first thing we must understand is the scope of the change. As Mason writes, the changes have been intellectual, legal, and institutional. At the intellectual level, academic research and conventional wisdom among economists and policymakers coalesced around the ideas that maximizing returns to shareholders is the only goal of a corporation, and that the financial markets were always right. At the legal level, laws regulating finance at the state level were overturned by the Supreme Court or preempted by federal regulators, and antitrust regulations were gutted by the Reagan administration and not taken up again.

At the institutional level, deregulation over several administrations led to a massive concentration of the financial sector into fewer, richer firms. As financial expertise became more prestigious than industry-specific knowledge, CEOs no longer came from within the firms they represented but instead from other firms or from Wall Street; their pay was aligned through stock options, which naturally turned their focus toward maximizing stock prices. The intellectual and institutional transformation was part of an overwhelming ideological change: the health and strength of the economy became identified solely with the profitability of the financial markets.

This was a bold revolution, and any program that seeks to change it has to be just as bold intellectually. Such a program will also require legal and institutional changes, ones that go beyond making sure that financial firms can fail without destroying the economy. Dodd-Frank can be thought of as a reaction against the worst excesses of the financial sector at the height of the housing bubble, and as a line of defense against future financial panics. Many parts of it are doing yeoman's work in curtailing the financial sector's abuses, especially in terms of protecting consumers from fraud and bringing some transparency to the Wild West of the derivatives markets. But the scope of the law is too limited to roll back these larger changes.

One provision of Dodd-Frank, however, suggests a way forward. At the urging of the AFL-CIO, Dodd-Frank empowered the Securities and Exchange Commission to examine the activities of private equity firms on behalf of their investors. At around $3.5 trillion, private equity is a massive market with serious consequences for the economy as a whole. On its first pass, the SEC found extensive abuses. Andrew Bowden, the director of the SEC's examinations office, stated that the agency found "what we believe are violations of law or material weaknesses in controls over 50 percent of the time."

Lawmakers could require private equity and hedge funds to standardize their disclosures of fees and holdings, as is currently the case for mutual funds. The decline in fees for mutual funds noted above didn't just happen by itself; it happened because the law structured the market for actual transparency and price competition. This will need to happen again for the broader financial sector.

But the most important change will be intellectual: we must come to understand our economy not as simply a vehicle for capital owners, but rather as the creation of all of us, a common endeavor that creates space for innovation, risk taking, and a stronger workforce. This change will be difficult, as we will have to alter how we approach the economy as a whole. Our wealth and companies can't just be strip-mined for a small sliver of capital holders; we'll need to bring the corporation back to the public realm. But without it, we will remain trapped inside an economy that only works for a select few.

[Whew!]

Puerto Barato said in reply to RC AKA Darryl, Ron,
"3 percent of U.S. gross domestic product. Today, that figure has more than doubled, to 6.5"
~~RC AKA Darryl, Ron ~

Growth of the non-financial-sector == growth in productivity

Growth of the financial-sector == growth in upward transfer of wealth

Ostensibly financial-sector is there to protect your money from being eaten up by inflation. Closer inspection shows that the prevention of *eaten up* is by the method of rent collection.

Accountants handle this analysis poorly, but you can see what is happening. Boiling it down to the bottom line you can easily see that wiping out the financial sector is the remedy to the Piketty.

Hell! Financial sector wiped itself out in 008. Problem was that the GSE and administration brought the zombie back to life then put the vampire back at our throats. What was the precipitating factor that snagged the financial sector without warning?

Unexpected
deflation
!

Gimme some
of that

pgl said in reply to djb...

People like Brad DeLong have noted this for a while. Twice as many people making twice as much money per person. And their true value to us - not a bit more than it was back in the 1940's.

Rock O Sock O Choco said in reply to djb... December 18, 2015 at 06:26 PM

JEC - MeanSquaredErrors said...

Wait, what?

Piketty looks at centuries of data from all over the world and concludes that capitalism has a long-run bias towards income concentration. Baker looks at 35 years of data in one country and concludes that Piketty is wrong. Um...?

A little more generously, what Baker actually writes is:

"The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to **this** rapid rise in inequality, as for example argued by Thomas Piketty." (emphasis added)

But Piketty has always been very explicit that the recent rise in US income inequality is anomalous -- driven primarily by rising inequality in the distribution of labor income, and only secondarily by any shift from labor to capital income.

So perhaps Baker is "correctly" refuting Straw Thomas Piketty. Which I suppose is better than just being obviously wrong. Maybe.

tew said...

Some simple math shows that this assertion is false "As a result of this upward redistribution, most workers have seen little improvement in living standards" unless you think an apprx. 60% in per-capita real income (expressed as GDP) among the 99% is "little improvement".

Real GDP 2015 / Real GDP 1980 = 2.57 (Source: FRED)
If the income share of the 1% shifted from 10% to 20% then The 1%' real GDP component went up 410% while that of The 99% went up 130%. Accounting for a population increase of about 41% brings those numbers to a 265% increase and a 62% increase.

Certainly a very unequal distribution of the productivity gains but hard to call "little".

I believe the truth of the statement is revealed when you look at the Top 5% vs. the other 95%.

cm said in reply to tew...

For most "working people", their raises are quickly eaten up by increases in housing/rental, food, local services, and other nondiscretionary costs. Sure, you can buy more and better imported consumer electronics per dollar, but you have to pay the rent/mortgage every months, how often do you buy a new flat screen TV? In a high-cost metro, a big ass TV will easily cost less than a single monthly rent (and probably less than your annual cable bill that you need to actually watch TV).

pgl said in reply to tew...

Are you trying to be the champion of the 1%? Sorry dude but Greg Mankiw beat you to this.

anne said...

In the years since 1980, there has been a well-documented upward redistribution of income. While there are some differences by methodology and the precise years chosen, the top one percent of households have seen their income share roughly double from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period....

-- Dean Baker

anne said in reply to anne...

http://www.census.gov/hhes/www/income/data/historical/household/

September 16, 2015

Real Median Household Income, 1980 & 2014


1980 ( 48,462)

2014 ( 53,657)


53,657 - 48,462 = 5,195

5,195 / 48,462 = 10.7%


Between 1980 and 2014 real median household income increased by a mere 10.7%.

anne said in reply to don...

I would be curious to know what has happened to the number of members per household....

http://www.census.gov/hhes/www/income/data/historical/household/

September 16, 2015

Household Size

2014 ( 2.54)
1980 ( 2.73)

[ The difference in household size to real median household incomes is not statistically significant. ]

anne said in reply to anne...

http://www.census.gov/hhes/www/income/data/historical/families/index.html

September 16, 2015

Real Median Family Income, 1948-1980-2014


1948 ( 27,369)

1980 ( 57,528)

2014 ( 66,632)


57,528 - 27,369 = 30,159

30,159 / 27,369 = 110.2%


66,632 - 57,528 = 9,104

9,104 / 57,528 = 15.8%


Between 1948 and 1980, real median family income increased by 110.2%, while between 1980 and 2014 real median family income increased by a mere 15.8%.

cm said...

"protectionist measures that have boosted the pay of doctors and other highly educated professionals"

Protectionist measures (largely of the variety that foreign credentials are not recognized) apply to doctors and similar accredited occupations considered to be of some importance, but certainly much less so to "highly educated professionals" in tech, where the protectionism is limited to annual quotas for some categories of new workers imported into the country and requiring companies to pay above a certain wage rate for work visa holders in jobs claimed to have high skills requirements.

A little mentioned but significant factor for growing wages in "highly skilled" jobs is that the level of foundational and generic domain skills is a necessity, but is not all the value the individual brings to the company. In complex subject matters, even the most competent person joining a company has to become familiar with the details of the products, the industry niche, the processes and professional/personal relationships in the company or industry, etc. All these are not really teachable and require between months and years in the job. This represents a significant sunk cost. Sometimes (actually rather often) experience within the niche/industry is in a degree portable between companies, but some company still had to employ enough people to build this experience, and it cannot be readily bought by bringing in however competent freshers.

This applies less so e.g. in medicine. There are of course many heavily specialized disciplines, but a top flight brain or internal organ surgeon can essentially work on any person. The variation in the subject matter is large and complex, but much more static than in technology.

That's not to knock down the skill of medical staff in any way (or anybody else who does a job that is not trivial, and that's true for many jobs). But specialization vs. genericity follow a different pattern than in tech.

Another example, the legal profession. There are similar principles that carry across, with a lot of the specialization happening along different legislation, case law, etc., specific to the jurisdiction and/or domain being litigated.

[Dec 18, 2015] How low can oil prices go? Opec and El Niño take a bite out of crudes cost

Oil is a valuable chemical resource that is now wasted because of low prices... "The obvious follow-up question is, how long will the sane people of the world continue to allow so much fossil-fuel combustion to continue? An exercise for readers."
Notable quotes:
"... Iran wont flood the market in 2016. Right now Iran is losing production. It takes time to reverse decline and make a difference. ..."
"... Those who predict very low prices dont understand the industry (I do). The low price environment reduces capital investment, which has to be there just to keep production flat (the decline is 3 to 5 million barrels of oil per day per year). At this time capacity is dropping everywhere except for a few select countries. The USA is losing capacity, and will never again reach this years peak unless prices double. Other countries are hopeless. From Norway to Indonesia to Colombia to Nigeria and Azerbaijan, peak oil has already taken place. ..."
"... If oil prices remain very low until 2025 itll either be because you are right or because the world went to hell. ..."
"... But Im with Carambaman - prices will go up again. Demand is and will still be there. The excess output will eventually end, and the prices stabilises. And then move up again. ..."
"... Time to examine the real question: how long can the Saudis maintain their current production rates? Theyre currently producing more than 10 Mbarrels/day, but lets take the latter figure as a lower bound. They apparently have (per US consulate via WikiLeaks--time for a followup?) at least 260 Gbarrels (though it seems no one outside Saudi really knows). You do the math: 260 Gbarrels / (10 Mbarrels/day) = 26 kdays ~= 70 years. @ 15 Mbarrels/day - 47.5 years. @ 20 Mbarrels/day - 35 years. ..."
"... The obvious follow-up question is, how long will the sane people of the world continue to allow so much fossil-fuel combustion to continue? An exercise for readers. ..."
"... Saudi Arabia, a US ally, using oil production and pricing to crush US oil shale industry? Did I read that correctly? ..."
"... Yeah, but I suspect it was *written* incorrectly. Im betting the Saudis real target is the Russians. ..."
"... In 1975 dollars, thats $8.31 / bbl (with a cumulative inflation factor of 342% over 40 years), or $.45 / gal for gas (assuming a current price of $2.00 / gal). ..."
"... I spent 30 years in the oil industry and experienced many cycles. When it is up people cannot believe it will go down and when it is down people cannot believe it will go up. It is all a matter of time ..."
Dec 16, 2015 | The Guardian

Fernando Leza -> jah5446 15 Dec 2015 06:12

Iran won't flood the market in 2016. Right now Iran is losing production. It takes time to reverse decline and make a difference.

Those who predict very low prices don't understand the industry (I do). The low price environment reduces capital investment, which has to be there just to keep production flat (the decline is 3 to 5 million barrels of oil per day per year). At this time capacity is dropping everywhere except for a few select countries. The USA is losing capacity, and will never again reach this year's peak unless prices double. Other countries are hopeless. From Norway to Indonesia to Colombia to Nigeria and Azerbaijan, peak oil has already taken place.

Fernando Leza -> SonOfFredTheBadman 15 Dec 2015 06:05

If oil prices remain very low until 2025 it'll either be because you are right or because the world went to hell. I prefer your vision, of course. But I'm afraid most of your talk is wishful thinking. Those of us who do know how to put watts on the table can't figure out any viable solutions. Hopefully something like cheap fusion power will rise. Otherwise you may be eating human flesh in 2060.

Fernando Leza -> p26677 15 Dec 2015 06:00

Keep assuming. I'll keep buying Shell stock.

MatCendana -> UnevenSurface 14 Dec 2015 03:36

Regardless of the breakeven price, producers with the wells already running or about to will keep pumping. Better to have some income, even if the operation is at a loss, than no income. This will go on and on right until the end, which is either prices eventually go up or they run out of oil and can't drill new wells.

But I'm with Carambaman - prices will go up again. Demand is and will still be there. The excess output will eventually end, and the prices stabilises. And then move up again.

Billy Carnes 13 Dec 2015 19:52

Also this hurts the states...Louisiana is now in the hole over 1.5 Billion or more

TomRoche 13 Dec 2015 12:31

@Guardian: Time to examine the real question: how long can the Saudis maintain their current production rates? They're currently producing more than 10 Mbarrels/day, but let's take the latter figure as a lower bound. They apparently have (per US consulate via WikiLeaks--time for a followup?) at least 260 Gbarrels (though it seems no one outside Saudi really knows). You do the math: 260 Gbarrels / (10 Mbarrels/day) = 26 kdays ~= 70 years. @ 15 Mbarrels/day -> 47.5 years. @ 20 Mbarrels/day -> 35 years.

That's just Saudi (allegedly) proven reserves. But it's plenty long enough to push atmospheric GHG levels, and associated radiative forcing, to ridiculously destructive excess.

The obvious follow-up question is, how long will the sane people of the world continue to allow so much fossil-fuel combustion to continue? An exercise for readers.

TomRoche -> GueroElEnfermero 13 Dec 2015 12:14

@GueroElEnfermero: 'Saudi Arabia, a US ally, using oil production and pricing to crush US oil shale industry? Did I read that correctly?'

Yeah, but I suspect it was *written* incorrectly. I'm betting the Saudis' real target is the Russians.

Sieggy 13 Dec 2015 11:49

In 1975 dollars, that's $8.31 / bbl (with a cumulative inflation factor of 342% over 40 years), or $.45 / gal for gas (assuming a current price of $2.00 / gal).

Carambaman 13 Dec 2015 10:25

I spent 30 years in the oil industry and experienced many cycles. When it is up people cannot believe it will go down and when it is down people cannot believe it will go up. It is all a matter of time

[Dec 17, 2015] The Feds decision to raise interest rates today is an unfortunate move in the wrong direction

Notable quotes:
"... The Feds decision to raise interest rates today is an unfortunate move in the wrong direction. In setting interest rate policy the Fed must decide whether the economy is at risk of having too few or too many jobs, with the latter being determined by the extent to which its current rate of job creation may lead to inflation. It is difficult to see how the evidence would lead the Fed to conclude that the greater risk at the moment is too many jobs. ..."
"... While at 5.0 percent, the unemployment rate is not extraordinarily high, most other measures of the labor market are near recession levels. The percentage of the workforce that is involuntarily working part-time is near the highs reached following the 2001 recession. The average and median duration of unemployment spells are also near recession highs. And the percentage of workers who feel confident enough to quit their jobs without another job lined up remains near the low points reached in 2002. ..."
"... While wage growth has edged up somewhat in recent months by some measures, it is still well below a rate that is consistent with the Fed's inflation target. Hourly wages have risen at a 2.7 percent rate over the last year. If there is just 1.5 percent productivity growth, this would be consistent with a rate of inflation of 1.2 percent. ..."
"... One positive point in today's action is the Fed's commitment in its statement to allow future rate hikes to be guided by the data, rather than locking in a path towards "normalization" as was effectively done in 2004. ..."
economistsview.typepad.com
Peter K. -> RC AKA Darryl, Ron... December 17, 2015 at 10:12 AM
"Corporate bond rates have been rising steadily since May. Yellen is not doing what Greenspan did in 2004."

There isn't much of a difference between signaling tighter money to a market that is skeptical of Fed forecasts and actually tightening.

http://cepr.net/press-center/press-releases/statement-on-fed-and-interest-rates

Washington, D.C.- Dean Baker, economist and a co-director of the Center for Economic and Policy Research (CEPR) issued the following statement in response to the Federal Reserve's decision regarding interest rates:

"The Fed's decision to raise interest rates today is an unfortunate move in the wrong direction. In setting interest rate policy the Fed must decide whether the economy is at risk of having too few or too many jobs, with the latter being determined by the extent to which its current rate of job creation may lead to inflation. It is difficult to see how the evidence would lead the Fed to conclude that the greater risk at the moment is too many jobs.

"While at 5.0 percent, the unemployment rate is not extraordinarily high, most other measures of the labor market are near recession levels. The percentage of the workforce that is involuntarily working part-time is near the highs reached following the 2001 recession. The average and median duration of unemployment spells are also near recession highs. And the percentage of workers who feel confident enough to quit their jobs without another job lined up remains near the low points reached in 2002.

"If we look at employment rates rather than unemployment, the percentage of prime-age workers (ages 25-54) with jobs is still down by almost three full percentage points from the pre-recession peak and by more than four full percentage points from the peak hit in 2000. This does not look like a strong labor market.

"On the other side, there is virtually no basis for concerns about the risk of inflation in the current data. The most recent data show that the core personal consumption expenditure deflator targeted by the Fed increased at just a 1.2 percent annual rate over the last three months, down slightly from the 1.3 percent rate over the last year. This means that the Fed should be concerned about being below its inflation target, not above it.

"While wage growth has edged up somewhat in recent months by some measures, it is still well below a rate that is consistent with the Fed's inflation target. Hourly wages have risen at a 2.7 percent rate over the last year. If there is just 1.5 percent productivity growth, this would be consistent with a rate of inflation of 1.2 percent.

"Furthermore, it is important to recognize that workers took a large hit to their wages in the downturn, with a shift of more than four percentage points of national income from wages to profits. In principle, workers can restore their share of national income (the equivalent of an 8 percent wage gain), but the Fed would have to be prepared to allow wage growth to substantially outpace prices for a period of time. If the Fed acts to prevent workers from getting this bargaining power, it will effectively lock in place this upward redistribution. Needless to say, workers at the middle and bottom of the wage distribution can expect to see the biggest hit in this scenario.

"One positive point in today's action is the Fed's commitment in its statement to allow future rate hikes to be guided by the data, rather than locking in a path towards "normalization" as was effectively done in 2004. If it is the case that the economy is not strong enough to justify rate hikes, then the hike today may be the last one for some period of time. It will be important for the Fed to carefully assess the data as it makes its decision on interest rates at future meetings.

"Recent economic data suggest that today's move was a mistake. Hopefully the Fed will not compound this mistake with more unwarranted rate hikes in the future."


RC AKA Darryl, Ron said in reply to Peter K....

I like Dean Baker. Unlike the Fed, Dean Baker is a class warrior on the side of the wage class. He makes the point about the path to normalization being critical that I have been discussing for quite a while. Let's hope this Fed knows better than Greenspan/Bernanke in 2004-2006. THANKS!

likbez said in reply to RC AKA Darryl, Ron...

Very true !

pgl said in reply to RC AKA Darryl, Ron...

"Longer-term bond rates barely moved, showing that there was very little news." This interest rate rose from 4.45% to 5.46% already. So the damage was already done:

https://research.stlouisfed.org/fred2/series/BAA

RC AKA Darryl, Ron said in reply to pgl...

"... This interest rate rose from 4.45% to 5.46% already..."

[Exactly! Corporate bond rates have been rising steadily since May. Yellen is not doing what Greenspan did in 2004. Yellen's Fed waited until the bond rate lifted off on its own (and maybe with some help from policy communications) before they raised the FFR. So far, there is no sign of their making a fatal error. They are not fighting class warfare for wage class either, but they seem intent on not screwing the pooch in the way that Greenspan and Bernanke did. No double dip thank you and hold the nuts.]

[Dec 17, 2015] Full employment is important for long-term reduction of inequality

Notable quotes:
"... Full employment is important for long-term reduction of inequality. Periods of high unemployment not only do damage to workers who lose their jobs and see their skills atrophy, but also cause those who keep their jobs to experience weaker wage growth. This is especially hard on those with lower incomes, who see larger cuts in working hours during periods of high unemployment. ..."
"... The elites like Feldman seem to be fine with golden parachutes for the wealthy but want to give the poor a lottery in place of a pension. Social Security is insurance that provides a safety net. Replacing SS with investments that allow people to fall through the cracks is not a good idea. ..."
economistsview.typepad.com

pgl said... December 17, 2015 at 01:46 AM

...

Full employment is important for long-term reduction of inequality. Periods of high unemployment not only do damage to workers who lose their jobs and see their skills atrophy, but also cause those who keep their jobs to experience weaker wage growth. This is especially hard on those with lower incomes, who see larger cuts in working hours during periods of high unemployment.

...As it looks like the economy will be weak, and interest rates low, for the foreseeable future, this is a problem that won't go away on its own. And as she concludes, "excessive emphasis on low and stable inflation at the expense of a strong labor market is unwarranted. Privileging low inflation over maximum employment means that more people are likely to experience unemployment, underemployment, or stagnant wages."

bakho -> pgl...
Our wealthy elites like cheap labor. High unemployment leads to cheap labor.
The newly employed are not likely to take up a collection to hire an outgoing Fed member. A banker might be willing to hire at a premium.
BenIsNotYoda -> pgl...

The Fed can not reduce inequality. This should be done with fiscal action - taxes, min wage hikes etc. To push Fed to consider inequality is pure mission creep and delusional. They will create more problems trying. What is next on the list? Cancer?

pgl -> BenIsNotYoda...

I'm not against fiscal stimulus but that is not decided by the FED. Congress is run by gold bug idiots. So the point that the FED should not be run by gold bug idiots stands...

BenIsNotYoda -> pgl...

The rule should be - do not do stupid things. And by absolving congress and pushing the Fed to do things they can not, you are part of the problem.

Peter K. -> BenIsNotYoda...

"The Fed can not reduce inequality."

Why not?

"This should be done with fiscal action - taxes, min wage hikes etc."

Why not all of the above?

"To push Fed to consider inequality is pure mission creep and delusional."

Why?

"They will create more problems trying."

Not true.

"What is next on the list? Cancer?""

reductio ad absurdum

William -> Peter K....

A Reductio is not actually a fallacy, it's an acceptable form of refutation.

His actual fallacy was a Slippery Slope.

That being said, I agree with pgl. Just because the person behind the steering wheel is trying to drive you into a ditch doesn't mean the person controlling the pedals can't hit the breaks.

(Though our current situation is more like the person behind the wheel is refusing to steer, and is instead spending their time drilling holes in the gas tank to keep us from going anywhere.)


Sanjait -> William...

His fallacy was in the original claim that the Fed can't do anything to reduce inequality. It's an especially obtuse claim at this moment in time.

Syaloch -> BenIsNotYoda...

Binder: "Privileging low inflation over maximum employment means that more people are likely to experience unemployment, underemployment, or stagnant wages."

Sure sounds to me like the Fed can reduce inequality.

Or do you think unemployment, underemployment, and stagnant wages have no impact on inequality?

RGC -> RGC...

Pushing on a string

From Wikipedia, the free encyclopedia

Pushing on a string is a figure of speech for influence that is more effective in moving things in one direction than another – you can pull, but not push.

If something is connected to someone by a string, they can move it toward themselves by pulling on the string, but they cannot move it away from themselves by pushing on the string. It is often used in the context of economic policy, specifically the view that "Monetary policy [is] asymmetric; it being easier to stop an expansion than to end a severe contraction

According to Roger G. Sandilans[1] and John Harold Wood[2] the phrase was introduced by Congressman T. Alan Goldsborough in 1935, supporting Federal Reserve chairman Marriner Eccles in Congressional hearings on the Banking Act of 1935:

Governor Eccles: Under present circumstances, there is very little, if any, that can be done.

Congressman Goldsborough: You mean you cannot push on a string.

Governor Eccles: That is a very good way to put it, one cannot push on a string. We are in the depths of a depression and... beyond creating an easy money situation through reduction of discount rates, there is very little, if anything, that the reserve organization can do to bring about recovery.[2]

The phrase is, however, often attributed to John Maynard Keynes: "As Keynes pointed out, it's like pushing on a string...",[3] "This is what Keynes meant by the phrase 'Pushing on a string.'"

https://en.wikipedia.org/wiki/Pushing_on_a_string

BenIsNotYoda -> Syaloch...

To all of the above,

The biggest factor increasing inequality is not high unemployment right now. It is sky high asset prices that is raising the net worth and income of the top 1% or 0.1%. Piketty documented this as well - asset prices and inequality cycles are highly correlated.

So what is Fed to do? They caused it in the first place.

Letting the economy run hot so wages go up - this way will take forever to reduce inequality to any appreciable degree.

Cascatore Хачатурян -> BenIsNotYoda..

"
Fed can not reduce inequality. This should be done with
"
~~BenIsNotYoda~

Do FG have 4 trillion $$$$ of assets still on their balance sheet? What happens when they auction these off into the free market? All asset prices drop? By supply/price/demand? As asset prices drop what happens to buying power of 1% jokers? Drops?

As buying power of 1% dudes drops they are able to buy less thus to some extent they cease to price 99% out of the market. Do you see the mechanism involved?

When the benBernank pushed onto the top of the stack first high rates then middle rates then low rates then small balance sheet as he expanded sheet with *twist*, you are thinking that the graniteJanet will pop balance sheet off the top of the stack first later pop 0% rates off top of the stack as we come out of the inner loop then revert to the parent process. This is subtle but important.

The graniteJanet used an offset on the stack pointer to dip into the middle of the stack to access higher rate first, bypassing the 4 trillion balance sheet. Do you see how all this fits together?

You now have 64 micro-seconds to crunch the numbers.

Good
luck
!

JohnH -> pgl...

As usual, pgl opposes any ideas that carry of whiff of criticism of the Fed and its ineffective, redistributive monetary policy. He must be responsible for PR for the Fed...

In fact the criticisms are spot on--its focus is more on higher inflation than on legally mandated maximum employment, it refuses to enforce regulations, and it is rife with cronyism, as Bernie's audit of the Fed revealed years ago.

Stiglitz advocates reform, noting that "The real problem is that money does not go to where it should go, as we see for example in the United States. The money does not flow into the real economy, because the transmission mechanism is broken...Access for small and medium enterprises to credit is too expensive. That's why it is so important that the transmission mechanism work." And of course, consumer credit rates barely budged since the Fed cut rates to zero, so ordinary people don't see the benefit, except for affluent mortgage holders.

http://www.cash.ch/news/alle/stiglitz-billiggeld-lost-kein-problem-3393853-448

Ellen Brown would go further--reinvent the entire banking system and cites Russia, Iceland, Ireland and Ecuador as places experimenting with new ideas.
http://ellenbrown.com/2015/12/11/reinventing-banking-developments-in-russia-iceland-the-uk-and-ecuador/

Of course, all of this is anathema to Fedbots like pgl, who insist that everything is hunky dory...if only the Fed would feed free money to his cronies forever, it would be heaven on earth.

Instead of taking any criticism of the Fed off the table, as pgl and his coterie fervently desire, it's long past time for a thorough debate about the Fed, its failed policies, and ways to extensively reform it.

bakho said...

Noah Corrects Feldman's funny numbers on entitlements and wealth inequality and comes to the opposite conclusion. The elites like Feldman seem to be fine with golden parachutes for the wealthy but want to give the poor a lottery in place of a pension. Social Security is insurance that provides a safety net. Replacing SS with investments that allow people to fall through the cracks is not a good idea.

[Dec 17, 2015] Update of CBOs long term SS projections

www.cbo.gov

"CBO's Publications - CBO's 2015 Long-Term Projections for Social Security: Additional Information"

New From CBO

pdf 446.38 KB

"CBO's 2015 Long-Term Projections for Social Security: Additional Information"

"Under current law, CBO projects, Social Security's trust funds, considered together, will be exhausted in 2029. In that case, benefits in 2030 would need to be reduced by 29 percent from the scheduled amounts."

Summary

"Social Security, which marked its 80th anniversary in 2015, is the largest single program in the federal government's budget. About 72 percent of the roughly 60 million people who currently receive Social Security benefits are retired workers or their spouses and children, and another 10 percent are survivors of deceased workers; all of those beneficiaries receive payments through Old-Age and Survivors Insurance (OASI). The remaining 18 percent of beneficiaries are disabled workers or their spouses and children; they receive Disability Insurance (DI) benefits.

In fiscal year 2015, spending for Social Security benefits totaled $877 billion, or almost one-quarter of federal spending. OASI payments accounted for about 84 percent of those outlays, and DI payments made up about 16 percent."

[Dec 16, 2015] Donald Trump's Divisiveness Is Bad for the Economy

Notable quotes:
"... A divided society cannot function optimally, especially when the divisions erect walls between groups that are difficult to cross. There are all sorts of attempts to divide us right now, but I want to focus on something other than the bigotry that has been on display in the Republican race for the presidential nomination, the division into winners and losers. ..."
"... To some extent that's correct, but competitive capitalism is not divisive. In fact, it is just the opposite. Competition is a great leveling force. ..."
"... For example, when a firm discovers something new, other firms, if they can, will copy it and duplicate the innovation. If a firm finds a highly profitable strategy, other firms will mimic it and take some of those profits for themselves. A firm might temporarily separate itself from other firms in an industry, but competition will bring them back together. Sometimes there are impediments to this leveling process such as patents, monopoly power, and talent that is difficult to duplicate, but competition is always there, waiting and watching. ..."
"... Competition also drives us forward individually and as a nation. It is a source of new innovation and new technology as people and firms try to find ways to do better than others, to earn higher incomes, gain more popularity, to escape from the pack. People pursue education and other ways to improve themselves not just as a source of knowledge, but also as a way to distinguish themselves. ..."
"... There are differences in talents and abilities, of course, that prevent a full leveling, but to the extent possible people will copy anything that leads to success. ..."
"... Inequality erects those barriers as those who have been fortunate try to protect themselves from capitalism's inherent tendency to erode away their superior position. They feel threatened by competition and do all they can to avoid it once they have found success. ..."
"... When those barriers exist, talent is wasted and we are worse off as a nation. How many great ideas will never be known simply because some people never had the education or opportunity needed to draw the ideas out? ..."
"... Separating the winners from the losers is okay if it is based on merit. If we start equally, and have the same chance to get ahead, then unequal outcomes are less of a concern. The problem is that some people are born "winners" even though they have done nothing to earn it, and others have little chance to win due to our unwillingness to truly embrace what equal opportunity means. ..."
Dec 15, 2015 | The Fiscal Times

White House spokesperson Josh Earnest described Donald Trump as "offensive and toxic," though that only begins to describe the corrosive effect his bigotry, divisiveness, and xenophobia have on our society. It is at odds with our values as a nation.

It's also bad for the economy.

A divided society cannot function optimally, especially when the divisions erect walls between groups that are difficult to cross. There are all sorts of attempts to divide us right now, but I want to focus on something other than the bigotry that has been on display in the Republican race for the presidential nomination, the division into winners and losers.

It might seem at first that this is exactly what capitalism does. It uses competition to separate people into various income classes, decide who gets the best jobs, who gets to live in desirable locations – it decides who wins and who loses. Some people, hopefully those who have earned it, do well and others fall behind. This drive to be a winner, it is argued, is the driving force behind capitalism.

To some extent that's correct, but competitive capitalism is not divisive. In fact, it is just the opposite. Competition is a great leveling force.

For example, when a firm discovers something new, other firms, if they can, will copy it and duplicate the innovation. If a firm finds a highly profitable strategy, other firms will mimic it and take some of those profits for themselves. A firm might temporarily separate itself from other firms in an industry, but competition will bring them back together. Sometimes there are impediments to this leveling process such as patents, monopoly power, and talent that is difficult to duplicate, but competition is always there, waiting and watching.

Competition also drives us forward individually and as a nation. It is a source of new innovation and new technology as people and firms try to find ways to do better than others, to earn higher incomes, gain more popularity, to escape from the pack. People pursue education and other ways to improve themselves not just as a source of knowledge, but also as a way to distinguish themselves.

However, any successful strategy will be followed. There are differences in talents and abilities, of course, that prevent a full leveling, but to the extent possible people will copy anything that leads to success. The fact that this is true – that capitalism will take away gains and differences if it can – is what drives people to continue to try to get ahead. If you rest on your laurels, they will be taken away.

But there is an essential feature in the system that makes it work, and this takes us back to the attempt by Trump and the Republican Party more generally to erect walls between groups of people. The system works best when people have the freedom to enter a new business (if they have the means and are willing to take the risk). It works best when people compete for jobs on equal footing, have access to the same opportunities, when there are no artificial barriers in society that prevent people from reaching their full potential.

Inequality erects those barriers as those who have been fortunate try to protect themselves from capitalism's inherent tendency to erode away their superior position. They feel threatened by competition and do all they can to avoid it once they have found success. And it's not just the wealthy. Even the middle class will attempt to erect roadblocks – social, legal, whatever it takes – if it feels threatened from competition from traditionally disadvantaged groups.

When those barriers exist, talent is wasted and we are worse off as a nation. How many great ideas will never be known simply because some people never had the education or opportunity needed to draw the ideas out?

But it's not just the children of poorer households that are disadvantaged by inequality. The children of the wealthy have no incentive, in many cases, to reach their full potential. Why struggle, take risks, do the hard work that is needed to come up with a new and useful idea when your needs are already taken care of? How much talent is wasted because of this?

It is not inequality that drives innovation and economic growth--it is the attempt to escape the leveling forces of capitalism. If we truly wanted to produce the most economic growth, everyone should start off equal to the extent possible. That way, everyone would have the incentive to differentiate themselves from others, and the means to do so. Inheritance taxes would be 100 percent; schools would be assigned randomly to ensure there's an incentive to equalize resources, and so on, and so on.

Of course, that will never happen. As we're seeing in the presidential election, those with means are trying to make the divisions larger rather than break them down. They tell us inequality drives our economy, when in fact inequality is an outcome, the driving force behind it is the desire to escape the equalizing forces of competition. Inequality as a starting point takes away opportunity from the children of the poor, and it dulls incentives for the children of the rich. It's not hard to understand why recent research has found that high and persistent inequality is associated with lower economic growth.

Separating the winners from the losers is okay if it is based on merit. If we start equally, and have the same chance to get ahead, then unequal outcomes are less of a concern. The problem is that some people are born "winners" even though they have done nothing to earn it, and others have little chance to win due to our unwillingness to truly embrace what equal opportunity means.

And, as Republican campaigns for the presidential nomination are making abundantly clear, that's just the way some people want it.

[Dec 15, 2015] FOMC Tomorrow, Cargo Cult Economics

Notable quotes:
"... So let's see how things go this week, keeping in mind that there may be antics aplenty after the Fed announcement and into the quad witch for stocks on Friday. ..."
Jesse's Café Américain

...There is a heavy lean towards believing that the Fed will raise rates 25 basis points.


Fed Funds futures are indicating expectation of a move to 100 basis points total by the end of next year. Let's see if they can pull that one off. It seems aspirational, if one wishes to have room to cut when their latest folly falls back upon them.

The idea that since recoveries are often accompanied by inflation, if we can only use monetary policy to create inflation then the recovery will come, is so wrong-headed that it leaves me aghast.

Even Keynes recognized that the point of stimulus was to provoke aggregate demand, which is the organic form of growth in the economy that will provide all the inflation that one might expect.

But to pursue this effete, top down stimulus focused primary on the still unreformed Banking system and the wealthiest top few percent is beyond policy error, and more policy malpractice. And of course, if one puts austerity and financial parasitism into the mix, then we just aren't in Kansas anymore Toto.

So let's see how things go this week, keeping in mind that there may be antics aplenty after the Fed announcement and into the quad witch for stocks on Friday. The miners have been beaten bloody.

[Dec 15, 2015] This Is How The Credit Crisis Spreads To Stocks

Notable quotes:
"... Yeah but its junk credit... who cares! I am invested in solid megacaps and even solider FANGs - what can go wrong? ..."
"... The biggest buyer of stocks in 2016, will be, according to Goldman Sachs, the same as it was in 2015 - corporate management teams buying back their own stock in near record quantities. But there is a problem with this thesis... the cost of funding these epic buybacks is surging, making the un-economic actions of the CFO (if very economical for their own bank accounts as they sell record amounts of their own personal stock to their company) even more irrational. ..."
"... Charts: Bloomberg ..."
"... And this is why the contagion to IG matters: the biggest buyer of stocks of the last few years is about to priced away as its (cheap debt) funding dries up, removing the biggest pillar of delusion from current equity valuations. ..."
"... Did nobody tell this stupid asshole that the west funds jihadism in order to conquer Russia? ..."
"... ...After Ukraine and Syria, Russians have no illusions left about how the West intends to treat Russia. Russians are ready for any action Putin may take against the West and any fall out from it for themselves. ..."
"... What is sometimes forgotten, is how the Bush neo-cons gave their "spin" to this narrative for the Middle East by casting Arab national secularists and Ba'athists as the offspring of "Satan": David Wurmser was advocating in 1996, "expediting the chaotic collapse" of secular-Arab nationalism in general, and Baathism in particular. He concurred with King Hussein of Jordan that "the phenomenon of Baathism" was, from the very beginning, "an agent of foreign, namely Soviet policy." ..."
"... Putin knows Erdogan was following Obama's orders when Erdogan let US Air Force pilots in Turkish planes shot down the Russian bomber. ..."
"... if the US were ever to develop the capability to neutralise a Russian nuclear attack, Russia can be guaranteed she will be treated with no greater respect than Iraq under Saddam was. Neither being locked in a weapons race to keep the US vulnerable to Russian attacks nor being prepared to live under Western dictates are options for Russia. ..."
"... Our DC Beltway and NYC elites are wildly delusional about their ability to win a nuclear war. They listen only to the defense contractors. In fact the West's elites are the prime target in a nuclear war, and even though a small and select strata might have time to hide in a deep bunker, the vast substrata that supports them, runs their bureaucracies and mans their deep state will certainly be annihilated. ..."
"... The nuclear war our elites seek to provoke will be the first in nearly a thousand years in which the elites themselves will be on the front lines of the combat. ..."
"... Personally, I think the biggest weakness the USA has is its increasingly diverse and divided population ..."
"... The Pentagon and their masters must expect to resolve any future major conflict by means of technologic jujitsu; if they think that Americans from all walks of life are going to rally in support of a major foreign war of choice, support mass conscription etc., they're making IMHO a big mistake. ..."
"... Still, with enough provocation and manipulation, perhaps the typical Amurican can be goosed into enthusiasm for a fight against Islam ; TPTB certainly seem to be giving this angle their best shot these days. ..."
"... What a shame, such stupidity; the other great power and nation that is at least still Western and Christian. Europe appears to be lost, and yet the U.S. arms Muslim armies and pokes Russia on its borders. Abject insanity. ..."
"... Simple. Kill the Neocons one by one and we have a safer world for your children, your family and you. ..."
Dec 14, 2015 | zerohedge.com

"Yeah but it's junk credit... who cares! I am invested in solid megacaps and even solider FANGs - what can go wrong?"

The biggest buyer of stocks in 2016, will be, according to Goldman Sachs, the same as it was in 2015 - corporate management teams buying back their own stock in near record quantities. But there is a problem with this thesis... the cost of funding these epic buybacks is surging, making the un-economic actions of the CFO (if very economical for their own bank accounts as they sell record amounts of their own personal stock to their company) even more irrational.

Here is Goldman's David Kostin explaining who the biggest buyer of stocks is (and will be) - as a reminder, it's not "mom(o) and pop".

We expect corporations will continue to be the largest source of demand for stocks, with net purchases by US companies totaling $450 billion, equal to about 2% of public equity cap. We forecast equity inflows from equity-related ETFs ($225 billion), equity mutual funds ($200 billion), life insurance ($50 billion), and foreign investors ($25 billion). We forecast net outflows from households ($25 billion) and pensions ($150 billion).

Well, the cost of funding that carnival of financial engineering and artifice (just ask Nordstrom, Macy's, IBM and so on) is soaring, as high-yield decompression pukes over into investment grade markets, spiking the cost of funding and crushing the 'economic feasibility' of debt-funded shareholder-friendliness:

Charts: Bloomberg

And, in case you thought "well, cost of funding has only gone up 30-40bps in IG, they can handle that," you are wrong! To all those who claim US corporate balance sheets are in great shape - they are not! Leverage is at record highs and interest coverage near record lows for the IG universe. And judging by today's collapse in Investment Grade bond prices, the market just woke up to this reality.

Simply put, the Fed's policies enabled massive releveraging and now corporations are stuck with few options to escape a vicious circle - which by the way, is why it's called the credit 'cycle'.

And this is why the contagion to IG matters: the biggest buyer of stocks of the last few years is about to priced away as its (cheap debt) funding dries up, removing the biggest pillar of delusion from current equity valuations.

Selected Skeptical Comments

strannick

Professor Steve Cohen, the foremost Russia scholar in the U.S., laments, is that it is this narrative which has precluded America from ever concluding any real ability to find a mutually acceptable modus vivendi with Russia – which it sorely needs, if it is ever seriously to tackle the phenomenon of Wahhabist jihadism (or resolve the Syrian conflict).

Wow, the foremost scholar on Russia is one dumb motherfucker. Did nobody tell this stupid asshole that the west funds jihadism in order to conquer Russia?

sam i am

The Western nations underestimated the horrible trauma that the Russian society experienced in 1990s when the Russians peacefully surrendered their society, their lands, their economy to the West, hoping to be accepted and treated as equals by the "world" community. Instead, the West dealt with the Russian skillfully, decisively, and mercilessly, just like the American Indians were dealt with by the colonizers. The Russia was gutted, scalped, and hanged on a cross to die slow and painful death. Some say that Russia like a cat has nine lives. Others say that Russia died and resurrected like Phoenix or Jesus. Open wounds have not healed yet, when after the February 22nd 2014 putsch in Kiev, and publication of the US Department of Defense tenders on the constructions of facilities in Sevastopol for the US fleet and NAVY everyone in Russia, including its government, understood that it was a declaration of war, and stood up in arms.

http://thesaker.is/ukraine-sitrep-december-13th-2015-by-scott/

Global Observer

...After Ukraine and Syria, Russians have no illusions left about how the West intends to treat Russia. Russians are ready for any action Putin may take against the West and any fall out from it for themselves.

Ghordius

"It is the basis to America's and Europe's claim to exceptionalism and leadership". seriously?

"What is sometimes forgotten, is how the Bush neo-cons gave their "spin" to this narrative for the Middle East by casting Arab national secularists and Ba'athists as the offspring of "Satan": David Wurmser was advocating in 1996, "expediting the chaotic collapse" of secular-Arab nationalism in general, and Baathism in particular. He concurred with King Hussein of Jordan that "the phenomenon of Baathism" was, from the very beginning, "an agent of foreign, namely Soviet policy.""

so? yes, King Hussein is right, in the very beginning it was mainly the Soviet Union that fostered Ba'athism. and again, so? the Soviet Union is no more

junction

Obama is stark raving mad, and his female neocons - Nuland, Powers and assorted other power hungry bitches - are too busy following orders from Israel to realize they are on a treasonous path to World War III. Putin will vaporize Raqqa with one of his new nuclear weapons that works like a neutron bomb. In all likelihood, when the first Kalibr cruise missiles hit ISIS/Bush's Captagon meth plant in Raqqa, the U.S. National Reconnaissance Office couldn't even detect them to warn CIA black ops spies in the drug facility to run. Putin knows Erdogan was following Obama's orders when Erdogan let US Air Force pilots in Turkish planes shot down the Russian bomber.

Global Observer

NOBODY WINS A NUCLEAR WAR.

I hope that Putin and his Military Advisors are smart enough to figure that out.

They are. But what the Americans don't seem to be aware of is that for some there are worse things than being dead and in order to avoid these worse things, people are prepared to die and nations willing to risk annihilation.

Russia is willing to risk annihilation in order to be able to live peacefully and with dignity. Is the USA willing to risk annihilation in order to be able to continue to insult Russia and bully the world? If the USA is indeed willing to risk annihilation to continue to do that, it would be silly for Russia not to attack the USA while she still can, because if the US were ever to develop the capability to neutralise a Russian nuclear attack, Russia can be guaranteed she will be treated with no greater respect than Iraq under Saddam was. Neither being locked in a weapons race to keep the US vulnerable to Russian attacks nor being prepared to live under Western dictates are options for Russia.

monk27

If the US will be stupid enough to start a war with Russia or/and China, it will lose such a fight big time. That will be the end of America as we know it, and also the end of the contemporary Western "elite" whether they believe it or not. Their move...

MrPalladium

"and also the end of the contemporary Western "elite"

Our DC Beltway and NYC elites are wildly delusional about "their" ability to win a nuclear war. They listen only to the defense contractors. In fact the West's elites are the prime target in a nuclear war, and even though a small and select strata might have time to hide in a deep bunker, the vast substrata that supports them, runs their bureaucracies and mans their deep state will certainly be annihilated.

No intelligent power like Russia is likely to waste a perfectly good nuke on Paducah Kentucky, but it is certain that the entire population of Manhattan Island, and the DC beltway will be vaporized along with West Los Angeles (propaganda production central) and Silly Valley. The effluvia of the silos in Iowa and Nebraska can be intercepted. Remarkably, our elites and their supporting substrata still believe that the main combatants will be rural boys from Texas and Tennessee which in a strange turn of justice will be the safest places to hide. Our 400 or so billionaire oligarchs who control this country are concentrated in about 20 zip codes. Do you really think that Russia hasn't already targeted them? The whole point of nuclear war is to decapitate the regime but spare the resources and general population for future use, and the real regime, the oligarchs, occupy a very modest and easily cleared amount of territory.

The nuclear war our elites seek to provoke will be the first in nearly a thousand years in which the elites themselves will be on the front lines of the combat.

August

I do like the way you think, Mr. P, and it's entertaining to speculate about war, TEOTWAWKI etc.

Personally, I think the biggest weakness the USA has is its increasingly diverse and divided population (which is also rather dumbed-down, infantile and irresponsible). The Pentagon and their masters must expect to resolve any future major conflict by means of technologic jujitsu; if they think that "Americans from all walks of life" are going to rally in support of a major foreign war of choice, support mass conscription etc., they're making IMHO a big mistake.

Still, with enough provocation and manipulation, perhaps the typical Amurican can be goosed into enthusiasm for a "fight against Islam"; TPTB certainly seem to be giving this angle their best shot these days.

monk27

"They" (i.e. the Russians) stand a better chance to survive than us. Ours is a much more complex AND violent society than theirs. The Mad Max way of living works only in movie...

Tall Tom

NO. THEY DO NOT. NUCLEAR WINTER, PAL.

You will either freeze to death or succumb to suffocation due to LACK OF OXYGEN.

The ash will blot out most sunlight. Plants require sunlight to photosynthesize Carbon, from CO2, into complex sugars and starches.

They transpire OXYGEN. Without the plants...YOU ARE DEAD.

Watch this video. Even the former Soviet Academy of Sciences concur with this modeling. NOBODY WILL SURVIVE. It is GLOBAL EXTINCTION. It is a God Damned Extinction Level Event.

https://www.youtube.com/watch?v=WCTKcd2Ko98

I am a physicist. This is valid science. My warning is not without a solid foundation.

Volkodav

Soviet did not so much invade. Soviet was already, support moderate government, building infrastructure, schools and other. Girls attended school in dresses.

Search for photos Kabul in 60's 70's

Moderate leader was murdered in coup by extremist backed from outsiders. Russians, moderates and monorities were slaughtered. That is when Soviet, after much concern debate, sent additional forces. Soviet was not defeated, but withdrew orderly result of collapse of funds, problems.

Soviet controlled more of country than west coalition ever did and alone, against outside interferences aiding radicals there was some beginning of what is today, some nasty creations. You never understood there was other side, moderate and civil

https://www.youtube.com/watch?v=Xc2KeSkl5H0

ebworthen

What a shame, such stupidity; the other great power and nation that is at least still Western and Christian. Europe appears to be lost, and yet the U.S. arms Muslim armies and pokes Russia on its borders. Abject insanity.

Insurrexion

Simple. Kill the Neocons one by one and we have a safer world for your children, your family and you.


[Dec 15, 2015] How to Invest in Bonds as Interest Rates Start Rising

Notable quotes:
"... For investors who hold bonds primarily for the income they generate, the drop in prices doesn't matter as much. That's because if you hold a bond until maturity, you never have to sell it and take a loss. ..."
TheStreet

Keep in mind that the Fed's first rate hike won't really change much. Rates will still be at historic lows. It all depends on how much the central bank raises rates in the coming months. So you don't have to rush to do anything.
An increase of 0.25 percentage point on Wednesday will almost certainly not result in big swings in bond values, especially given how many in the market expect the hike. And the Fed is likely to say that the pace of future increases will be slow.

Still, higher rates lessen the value of the bonds you currently own. That's because newly issued bonds under those higher rates will pay out more than older ones. So the price of your older bonds falls as a result.

For investors who hold bonds primarily for the income they generate, the drop in prices doesn't matter as much. That's because if you hold a bond until maturity, you never have to sell it and take a loss.

But it's a different story if you hold bonds through a mutual fund, as most investors do. The value of the fund declines with any interest rate hike because the fund becomes less attractive to investors.

The drop in value is closely linked with the term of the bonds, known as duration. Those durations are usually indicated as short term, intermediate term, or long term. In theory, short-term bonds will drop the least in value, and long-term bonds will drop the most when rates go up.

So what should investors do?

Larry Swedroe, author of The Only Guide to a Winning Bond Strategy You'll Ever Need, urges investors not to make big moves without making a plan first.

"Inaction is almost always better" than making a sudden shift in strategy in a panic, he said.

"The most anticipated event of any we can think of is that the Fed is going to raise interest rates on Dec. 16," Swedroe said. "The market must already have that information incorporated into the current price" of bonds (and stocks too, for that matter).

Don't try to outsmart the market, said Swedroe, who also is director of research for the BAM Alliance of financial advisers.

Investors "stretching for yield" can make "very bad errors," Swedroe said, including investing in real estate investment trusts, dividend-paying stocks, emerging-market bonds, and other securities that are much more risky than bonds.

If the economy falters and investors flee those asset classes and move to high-quality investments, investors in riskier assets "get crushed, just when you need the safety the most," said Swedroe.

Swedroe suggests three possible strategies for investors looking for yield in this market.


1.Stick to the middle. For bonds, the "sweet spot" for balancing risk and reward is via intermediate-term bonds with about a 5-year duration, Swedroe said. Investors there can get "most of the term premium without the longer-term inflation risk." Consider any low-cost, intermediate-term, high-quality bond fund, he said. That could include the Vanguard Intermediate-Term Bond ETF (BIV) or the Fidelity Spartan U.S. Bond Index Fund (FBIDX) -- there are many such funds available.
2.Move to CDs. Investors who really want yield but can't stomach the market fluctuation of bond funds should look at certificates of deposit, "where you can have much higher yields" than bonds but with very low risk and no mutual fund fees. For example, 5-year CDs can pay up to 2.45% in annual percentage yield, while 5-year U.S. Treasury securities pay a yield of a mere 1.56%. Swedroe said CDs are most useful for investors with IRAs, who can choose where they hold their assets.
3.Embrace the wisdom of the markets. This is the most Zen option. Swedroe said investors should take a page out of Warren Buffett's book, ignore market forecasts, and simply develop a financial plan. Find the best way to implement the plan -- with simplicity and low costs. "Stop worrying and stick with your plan," he said. Forever.

If investors really do want to rely on the consensus judgment of the markets, they should consider the world's largest bond fund, the Vanguard Total Bond Market Index (VBMFX) (VBTLX) (BND) . (In April, Vanguard's fund surpassed Pacific Investment Management's Pimco Total Return Fund (PTTAX) , which had been the largest bond fund for decades.)

Must Read: Why Wall Street Won't Be Pouring Cristal on New Year's Eve

Vanguard's Total Bond index fund is totally market weighted, with no active calls about which types of bonds will outperform and which will not. The investor class charges a 0.2% fee annually, and the ETF class charges 0.07%. The fund's SEC yield is 2.27% and its average duration is 5.8 years (in the "sweet spot"), and its pretax return for the past 12 months as of Sept. 30 has been 2.64%. It's hard to get cheaper or simpler.

Investors can also buy Treasury bonds directly from the government via Treasury Direct -- and pay no fees. The bonds available there are high-quality and simple to buy. There are some caveats: EE and E savings bonds must be held for at least one year, and you'll pay a penalty of three months' interest if you sell them within five years of buying them; they earn interest for 30 years. Other Treasury notes and bonds can be bought directly through Treasury Direct, but if you want to sell them before their term is up, you'll need to move them to a broker for sale. You can also buy resold Treasury securities at auction on Treasury Direct.

And investors should also maintain perspective, according to Vanguard.

"Many people look at bonds independently from their stocks," Fran Kinniry, of Vanguard's Investment Strategy Group, said in a statement. "But it's more beneficial to think, 'How do my bonds complement my stocks and fit into my whole investment picture?' You really want to put the two types of investments together and see how they interact as a whole. Ask yourself: 'What's my risk level for all my holdings? Does it align with my risk comfort if there's a downturn?' If you answer no, make the appropriate adjustments."

In other words, investors should hold bonds to manage volatility, to provide consistency in a portfolio, and to earn a reasonable return. Using bonds for speculation or to take more risk makes an entire portfolio more volatile.

So investors may want to stick to plain-vanilla bonds. If they plan to hold a bond fund to its average duration, which is listed on the prospectus, they will likely come out ahead even after an interest rate hike -- being paid more in interest than they have lost to reduced principal (or the face value of the bonds).

Investors hold bonds for safety -- or at least they should. If you have too much money tied up in junk bonds or in long-term bonds, be prepared for swings in the value of the principal. If you can wait out the duration of the bonds, you will likely be OK. If you can't stomach big swings, face that about yourself and move to shorter duration bonds or CDs. They could pay less, but they will also fluctuate less in value.

Must Read: 8 Winning Financial Stocks Once the Fed Raises Interest Rates

Fixed-income investing is about reducing risk and receiving a predictable payment on schedule. Remember that the bonds will keep paying the same even if their face value has dropped.

Now's the time when bond investors should verify that they have enough -- not too much, not too little -- in bonds, then sit back and collect the interest.


[Dec 14, 2015] Offshoring and Unskilled Labor Demand Evidence That Trade Matters

Notable quotes:
"... I actually think that the bigger effect is not just offshoring, but a vicious circle relating to increasing inequality. After all, most of the economy today is services, but if normal people cant afford the services anymore, then that will of course stagnate, forcing down wages decreasing the affordability even more (or causing substitution of inferior automated or remote services). ..."
"... That is why the one employment bright spot is medical services which are subsidised (one way or the other) almost everywhere. We really have to investigate more the distribution of the circulation of money, how the concentration of money in a few hands means that money circulates through relatively hands. I dont know of anybody who actually investigates this. You could say, it is the disaggregation-is-important problem. ..."
"... One thing that really annoys with political discussion today is the dominance of money illusion. This is particularly extreme in the Euro area today where Germans keep complaining that so and so will be taking our tax money . No one ever seems to stop and think, where does the money come from in the first place , and yet, in macro-economics, this is absolutely the most important question. Nobody even seems to notice that both deleveraging and bankruptcy actively destroy money and that money needs to be replaced. ..."
"... Foreign companies like Toyota and Honda solidified their dominance in family and economy cars, gained market share in high-margin luxury cars, and, in an ironic twist, soon stormed in with their own sophisticatedly engineered and marketed SUVs, pickups and minivans. Detroit, suffering from a "good enough" syndrome and wedded to ineffective marketing gimmicks like rebates and zero-percent financing, failed to give consumers what they really wanted - reliability, the latest technology and good design at a reasonable cost. ..."
"... Yes, I see offshoring as a transitional stage while foreign workers are cheaper than machines. ..."
"... The plot was about automation, but the moral was about humanity. :) ..."
"... "The main business of humanity is to do a good job of being human beings, said Paul, not to serve as appendages to machines, institutions, and systems." ..."
"... It is not the PRODUCERS who have a huge incentive to make sure it never happens. Au contraire, they want their consumers to have more money. It is the OWNERS who want to make sure it never happens because that would dilute their power. ..."
Dec 14, 2015 | Economist's View

Syaloch said in reply to cm...

So you think that offshoring does not eventually increase living standards in the destination countries? That's odd. What's your evidence?

Automation may not be the first response, but it's always in the equation:

CEO: "Those pesky foreign workers are asking for more again! Machines are so much easier to work with. Can we replace them with machines yet?"

CTO: "Let me check... No, not yet, but a lot of smart people are working on it."

CEO: "OK, then let's look for another offshoring partner with more complacent workers for now and revisit this later."

The answer to this automation question only has to be yes once to permanently change the playing field.

reason said...

I actually think that the bigger effect is not just offshoring, but a vicious circle relating to increasing inequality. After all, most of the economy today is services, but if normal people can't afford the services anymore, then that will of course stagnate, forcing down wages decreasing the affordability even more (or causing substitution of inferior automated or remote services).

That is why the one employment bright spot is medical services which are subsidised (one way or the other) almost everywhere. We really have to investigate more the distribution of the circulation of money, how the concentration of money in a few hands means that money circulates through relatively hands. I don't know of anybody who actually investigates this. You could say, it is the disaggregation-is-important problem.

reason said...

One thing that really annoys with political discussion today is the dominance of money illusion. This is particularly extreme in the Euro area today where Germans keep complaining that so and so will be taking "our tax money". No one ever seems to stop and think, "where does the money come from in the first place", and yet, in macro-economics, this is absolutely the most important question. Nobody even seems to notice that both deleveraging and bankruptcy actively destroy money and that money needs to be replaced.

RC AKA Darryl, Ron said in reply to pgl...

"...the empty suits running GM and Ford were both greedy and incompetent..."

[Yep!]

http://www.amazon.com/The-United-States-Toyota-Squandered/dp/1592993028

The United States of Toyota: How Detroit Squandered Its Legacy and Enabled Toyota to Become America's Car Company

September 11, 2007

by Peter M. DeLorenzo

The United States of Toyota is many stories in one. First and foremost, it is a business story, detailing the decline of the American automobile industry - and the simultaneous rise of an Asian manufacturer to take its place. It is also a history book, providing an intimate portrait of the larger-than-life personalities and cars that led the American auto industry through its glory days and down the path toward extinction. It is a political/current affairs piece, presenting the rise of a Japanese company - Toyota - not just in terms of its sales success but also in terms of its cultural success, as it works to assimilate into American society. And finally, it is a never-before-seen primer on Detroit - The Motor City - a town and a region dominated by the auto companies, their suppliers and their ad agencies - and by a mindset and culture all its own. In commentary that is as accurate as it is blunt, Peter De Lorenzo presents the players and the action in the auto business in a way not seen before in print. His voice is unique and refreshingly candid. His provocative analyses and assessments - grounded in personal experience and a lifelong immersion in all things automotive - present a compelling picture of the state of the auto business - how it used to be, what it has become and where it is headed. From the arrogance and short-sightedness of the Detroit manufacturers to the acumen and relentlessness of Toyota, The United States of Toyota paints an insightful portrait of an iconic American industry as it struggles for survival in the early years of the 21st century.

http://www.amazon.com/The-End-Detroit-American-Market/dp/0385507704

The End of Detroit: How the Big Three Lost Their Grip on the American Car Market


September 21, 2004
by Micheline Maynard

An in-depth, hard-hitting account of the mistakes, miscalculations and myopia that have doomed America's automobile industry.

In the 1990s, Detroit's Big Three automobile companies were riding high. The introduction of the minivan and the SUV had revitalized the industry, and it was widely believed that Detroit had miraculously overcome the threat of foreign imports and regained its ascendant position. As Micheline Maynard makes brilliantly clear in THE END OF DETROIT, however, the traditional American car industry was, in fact, headed for disaster. Maynard argues that by focusing on high-profit trucks and SUVs, the Big Three missed a golden opportunity to win back the American car-buyer.

Foreign companies like Toyota and Honda solidified their dominance in family and economy cars, gained market share in high-margin luxury cars, and, in an ironic twist, soon stormed in with their own sophisticatedly engineered and marketed SUVs, pickups and minivans. Detroit, suffering from a "good enough" syndrome and wedded to ineffective marketing gimmicks like rebates and zero-percent financing, failed to give consumers what they really wanted - reliability, the latest technology and good design at a reasonable cost. Drawing on a wide range of interviews with industry leaders, including Toyota's Fujio Cho, Nissan's Carlos Ghosn, Chrysler's Dieter Zetsche, BMW's Helmut Panke, and GM's Robert Lutz, as well as car designers, engineers, test drivers and owners, Maynard presents a stark picture of the culture of arrogance and insularity that led American car manufacturers astray. Maynard predicts that, by the end of the decade, one of the American car makers will no longer exist in its present form.

*

[Like the executives of the US steel industry before them, the management of the big three (plus one) US automakers possessed legendary inabilities when it came to product development and production quality control. One can only imagine that their golf games must have been better than their understanding of auto making.]

pgl said in reply to RC AKA Darryl, Ron...

Exactly - products designs that were better than our. Lean production which we were slow to adapt. And there are those Jan commercials. Toyotas are selling like crazy. But at least Ford and GM is finally under new management.

sanjait said in reply to pgl...

A few decades later ... Ford and GM do indeed look to be getting their act together. I'd buy a car from either one of those companies today.

lower middle class said...

Paging Dr. Proteus... Dr. Paul Proteus!

cm said in reply to lower middle class...

That was automation, not offshoring.

Syaloch said in reply to cm...

In the end that's a distinction without a difference.

Julio said in reply to Syaloch...

Yes, I see offshoring as a transitional stage while foreign workers are cheaper than machines.

RC AKA Darryl, Ron said in reply to Julio...

Machines could not open up SE Asian markets to US firms in the way that offshoring could.

Syaloch said in reply to RC AKA Darryl, Ron...

Suppose we visited those factories from Player Piano and discovered that the few highly educated workers remaining were not overseeing automated machines, but rather shipping raw materials over to a foreign country where goods were produced by low-wage laborers. In terms of the domestic economy, would that make any difference?

Large-scale offshoring was enabled by machines that made the exchange of goods and information between remote locations possible. Whatever residual labor component is involved is merely an automation problem that hasn't been solved... yet.

RC AKA Darryl, Ron said in reply to Syaloch...

MNCs wanted their capital investment to have access to the markets with the most growth potential. Regulatory and FOREX arbitrage helped. Labor costs were low on the totem pole.

Syaloch said in reply to RC AKA Darryl, Ron...

That's more true with offshored manufacturing than with services. US companies aren't sending call center jobs to India because they hope to serve the Indian market.

But even with regard to manufacturing labor costs are obviously a major consideration. Just watch any episode of "Shark Tank" and listen to the sharks explain how stupid anyone is for trying to manufacture anything here in the US. Are t-shirts sewn in Bangladesh because of the huge growth potential in apparel sales there? Were the Mexican maquiladoras set up to have better access to the Mexican market?

lower middle class said in reply to cm...

The plot was about automation, but the moral was about humanity. :)

"The main business of humanity is to do a good job of being human beings," said Paul, "not to serve as appendages to machines, institutions, and systems."
― Kurt Vonnegut, Player Piano

Syaloch said in reply to lower middle class...

Toward the end of Player Piano the Shah of Bratpuhr asks a very good question: What are people for?

When I first read Player Piano I also happened by pure chance to be reading a collection of essays by Wendell Berry titled "What Are People For?"

The eponymous essay from Berry's collection was a great complement to Vonnegut's book.

lower middle class said in reply to Syaloch...

Time for me to visit the library, thanks Syaloch!

reason said...

New Deal democrat
Yes, it is part of your name (and was copied then throughout the Western world). Then of course there was the Russian and Chinese revolutions, which at least initially were very egalitarian.

New Deal democrat said in reply to reason...

I think you misunderstood my point, which was about liberalizing international trade. I'm not 100% sure, but I don't think that was a really high priority of the Russian and Chinese revolutions. :)

pgl said in reply to New Deal democrat...

I studied Russian history. Free trade was not exactly what drove Lenin. And it is certainly not what drives Putin.

PPaine said in reply to New Deal democrat...

There was a significant debate about trade early on with bukharin advocating. Two way openness. And Lenin a two way state monopoly. Lenin anticipated what happened to russia after the wall fell ....70 or so years later.

He had a keen insight into MNCs free for all tactics. Unfortunately state concessions which he supported faced a tacit constriction.

Despite notable exceptions including Pater Koch

reason said...

P.S. New Deal democrat

It is not the PRODUCERS who have a huge incentive to make sure it never happens. Au contraire, they want their consumers to have more money. It is the OWNERS who want to make sure it never happens because that would dilute their power.

RC AKA Darryl, Ron said in reply to reason...

Yep. Capital gains... and gains... and gains, until there is little left for labor gains.

pgl said in reply to RC AKA Darryl, Ron...

Nike makes obscene profits. And for what? Designing new shoes? They don't make anything - their third party Chinese manufacturers do the hard work at low wages. BTW - the US does not get to tax those Nike profits as they end up in Bermuda.

[Dec 13, 2015] While redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits

For the last several year buying "junkest junk" was a profitable strategy. Now it came to abrupt end.
Notable quotes:
"... The rest of the industry has been quick to say that while redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits. ..."
"... Goldman Sachs, for one, put out a note Friday warning Franklin Resources "is most at risk" given the large high-yield holdings of its funds, poor performance and large outflows. On Friday, its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value of exchange-traded funds that track high-yield debt. ..."
"... The idea of a "run" on mutual funds might sound strange. Typically, runs are associated with highly leveraged banks engaged in maturity transformation, funding long-term loans with short-term debt. Nearly all the programs designed to avoid destabilizing runs-from deposit insurance to the Fed's discount window to liquidity requirements-are built for banks. But unleveraged investors, including mutual funds, can also give rise to runs. That is because there is a liquidity mismatch in mutual funds that hold relatively illiquid assets funded by investors entitled to daily redemptions. ..."
peakoilbarrel.com
Jeffrey J. Brown, 12/13/2015 at 4:06 pm
Interesting WSJ article (do a Google Search for the title, for access). Last week, the Journal noted that Chesapeake bonds that traded at 80¢ on the dollar a few months ago were currently trading at 30¢ to 40¢ on the dollar. I suspect that there are some huge losses on the books of a lot of pension funds.

WSJ: The Liquidity Trap That's Spooking Bond Funds
The specter of a destabilizing run on debt is haunting markets

The debt world is haunted by a specter-of a destabilizing run on markets.

Last week, this took on more form even if there weren't concrete signs of panic. Only one mutual fund manager, Third Avenue Management, has said it would halt redemptions to forestall having to dispose of assets in a fire sale. The rest of the industry has been quick to say that while redemptions are elevated, particularly in high-yield bond funds, there doesn't seem to be a rush to for the exits.

Still, growing angst comes as the oil-price rout continues and the U.S. Federal Reserve appears ready to raise rates. This has investors worried-and starting to ask the fearful question: "Who's next?"

Goldman Sachs, for one, put out a note Friday warning Franklin Resources "is most at risk" given the large high-yield holdings of its funds, poor performance and large outflows. On Friday, its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value of exchange-traded funds that track high-yield debt.

The idea of a "run" on mutual funds might sound strange. Typically, runs are associated with highly leveraged banks engaged in maturity transformation, funding long-term loans with short-term debt. Nearly all the programs designed to avoid destabilizing runs-from deposit insurance to the Fed's discount window to liquidity requirements-are built for banks. But unleveraged investors, including mutual funds, can also give rise to runs. That is because there is a liquidity mismatch in mutual funds that hold relatively illiquid assets funded by investors entitled to daily redemptions.

[Dec 13, 2015] Deregulation of exotic financial instruments like derivatives and credit-default swaps and corruption of Congress and government

Notable quotes:
"... Can you list all of the pro- or anti- Wall Street reforms and actions Bill Clinton performed as President including nominating Alan Greenspan as head regulator? Cutting the capital gains tax? Are you aware of Greenspans record? ..."
"... Its actually pro-neoliberalism crowd vs anti-neoliberalism crowd. In no way anti-neoliberalism commenters here view this is a character melodrama, although psychologically Hillary probably does has certain problems as her reaction to the death of Gadhafi attests. The key problem with anti-neoliberalism crowd is the question What is a realistic alternative? Thats where differences and policy debate starts. ..."
"... Events do not occur in isolation. GLBA increased TBTF in AIG and Citi. TBTF forced TARP. GLBA greased the skids for CFMA. Democrats gained majority, but not filibuster proof, caught between Iraq and a hard place following their votes for TARP and a broader understanding of their participation in the unanimous consent passage of the CFMA, over objection by Senators James Inhofe (R-OK) and Paul Wellstone (D-MN). ..."
"... It certainly fits the kind of herd mentality that I always saw in corporate Amerika until I retired. The William Greider article posted by RGC was very consistent in its account by John Reed with the details of one or two books written about AIG back in 2009 or so. I dont have time to hunt them up now. Besides, no one would read them anyway. ..."
"... GS was one of several actions taken by the New Deal. That it wasnt sufficient by itself doesnt equate to it wasnt beneficial. ..."
"... "Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century," said then-Treasury Secretary Lawrence Summers. "This historic legislation will better enable American companies to compete in the new economy." ..."
"... The repeal of Glass Steagal was a landmark victory in deregulation that greased the skids for the passage of CFMA once Democrats had been further demoralized by the SCOTUS decision on Bush-v-Gore. The first vote on GLBA was split along party lines, but passed because Republicans had majority and Clinton was willing to sign which was clear from the waiver that had been granted to illegal Citi merger with Travelers. Both Citi and AIG mergers contributed to too big to fail. The CFMA was the nail in the coffin that probably would have never gotten off the ground if Democrats had held the line on the GLBA. Glass-Steagal was insufficient as a regulatory system to prevent the 2008 mortgage crisis, but it was giant as an icon of New Deal financial system reform. Its loss institutionalized too big to fail ..."
"... Gramm Leach Biley was a mistake. But it was not the only failure of US regulatory policies towards financial institutions nor the most important. ..."
"... It was more symbolic caving in on financial regulation than a specific technical failure except for making too big to fail worse at Citi and AIG. It marked a sea change of thinking about financial regulation. Nothing mattered any more, including the CFMA just a little over one year later. Deregulation of derivatives trading mandated by the CFMA was a colossal failure and it is not bizarre to believe that GLBA precipitated the consensus on financial deregulation enough that after the demoralizing defeat of Democrats in Bush-v-Gore then there was no New Deal spirit of financial regulation left. Social development is not just a series of unconnected events. It is carried on a tide of change. A falling tide grounds all boats. ..."
"... We had a financial dereg craze back in the late 1970s and early 1980s which led to the S L disaster. One would have thought we would have learned from that. But then came the dereg craziness 20 years later. And this disaster was much worse. ..."
"... This brings us to Lawrence Summers, the former Treasury Secretary of the United States and at the time right hand man to then Treasury Security Robert Rubin. Mr. Summers was widely credited with implementation of the aggressive tactics used to remove Ms. Born from her office, tactics that multiple sources describe as showing an old world bias against women piercing the glass ceiling. ..."
"... According to numerous published reports, Mr. Summers was involved in. silencing those who questioned the opaque derivative product's design. ..."
"... The Tax Policy Center estimated that a 0.1 percent tax on stock trades, scaled with lower taxes on other assets, would raise $50 billion a year in tax revenue. The implied reduction in trading revenue was even larger. Senator Sanders has proposed a tax of 0.5 percent on equities (also with a scaled tax on other assets). This would lead to an even larger reduction in revenue for the financial industry. ..."
"... Great to see Bakers acknowledgement that an updated Glass-Steagall is just one component of the progressive wings plan to rein in Wall Street, not the sum total of it. Besides, if Wall Street types dont think restoring Glass-Steagall will have any meaningful effects, why do they expend so much energy to disparage it? Methinks they doth protest too much. ..."
"... Yes thats a good way to look it. Wall Street gave the Democrats and Clinton a lot of campaign cash so that they would dismantle Glass-Steagall. ..."
"... Slippery slope. Ya gotta find me a business of any type that does not protest any kind of regulation on their business. ..."
"... Yeah, but usually because of all the bad things they say will happen because of the regulation. The question is, what do they think of Clintons plan? Ive heard surprisingly little about that, and what I have heard is along these lines: http://money.cnn.com/2015/10/08/investing/hillary-clinton-wall-street-plan/ ..."
"... Hillary Clinton unveiled her big plan to curb the worst of Wall Streets excesses on Thursday. The reaction from the banking community was a shrug, if not relief. ..."
"... Iceland's government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled "A better monetary system for Iceland". ..."
economistsview.typepad.com

RGC said...

Hillary Clinton Is Whitewashing the Financial Catastrophe

She has a plan that she claims will reform Wall Street-but she's deflecting responsibility from old friends and donors in the industry.

By William Greider
Yesterday 3:11 pm

Hillary Clinton's recent op-ed in The New York Times, "How I'd Rein In Wall Street," was intended to reassure nervous Democrats who fear she is still in thrall to those mega-bankers of New York who crashed the American economy. Clinton's brisk recital of plausible reform ideas might convince wishful thinkers who are not familiar with the complexities of banking. But informed skeptics, myself included, see a disturbing message in her argument that ought to alarm innocent supporters.

Candidate Clinton is essentially whitewashing the financial catastrophe. She has produced a clumsy rewrite of what caused the 2008 collapse, one that conveniently leaves her husband out of the story. He was the president who legislated the predicate for Wall Street's meltdown. Hillary Clinton's redefinition of the reform problem deflects the blame from Wall Street's most powerful institutions, like JPMorgan Chase and Goldman Sachs, and instead fingers less celebrated players that failed. In roundabout fashion, Hillary Clinton sounds like she is assuring old friends and donors in the financial sector that, if she becomes president, she will not come after them.

The seminal event that sowed financial disaster was the repeal of the New Deal's Glass-Steagall Act of 1933, which had separated banking into different realms: investment banks, which organize capital investors for risk-taking ventures; and deposit-holding banks, which serve people as borrowers and lenders. That law's repeal, a great victory for Wall Street, was delivered by Bill Clinton in 1999, assisted by the Federal Reserve and the financial sector's armies of lobbyists. The "universal banking model" was saluted as a modernizing reform that liberated traditional banks to participate directly and indirectly in long-prohibited and vastly more profitable risk-taking.

Exotic financial instruments like derivatives and credit-default swaps flourished, enabling old-line bankers to share in the fun and profit on an awesome scale. The banks invented "guarantees" against loss and sold them to both companies and market players. The fast-expanding financial sector claimed a larger and larger share of the economy (and still does) at the expense of the real economy of producers and consumers. The interconnectedness across market sectors created the illusion of safety. When illusions failed, these connected guarantees became the dragnet that drove panic in every direction. Ultimately, the federal government had to rescue everyone, foreign and domestic, to stop the bleeding.

Yet Hillary Clinton asserts in her Times op-ed that repeal of Glass-Steagall had nothing to do with it. She claims that Glass-Steagall would not have limited the reckless behavior of institutions like Lehman Brothers or insurance giant AIG, which were not traditional banks. Her argument amounts to facile evasion that ignores the interconnected exposures. The Federal Reserve spent $180 billion bailing out AIG so AIG could pay back Goldman Sachs and other banks. If the Fed hadn't acted and had allowed AIG to fail, the banks would have gone down too.

These sound like esoteric questions of bank regulation (and they are), but the consequences of pretending they do not matter are enormous. The federal government and Federal Reserve would remain on the hook for rescuing losers in a future crisis. The largest and most adventurous banks would remain free to experiment, inventing fictitious guarantees and selling them to eager suckers. If things go wrong, Uncle Sam cleans up the mess.

Senator Elizabeth Warren and other reformers are pushing a simpler remedy-restore the Glass-Steagall principles and give citizens a safe, government-insured place to store their money. "Banking should be boring," Warren explains (her co-sponsor is GOP Senator John McCain).
That's a hard sell in politics, given the banking sector's bear hug of Congress and the White House, its callous manipulation of both political parties. Of course, it is more complicated than that. But recreating a safe, stable banking system-a place where ordinary people can keep their money-ought to be the first benchmark for Democrats who claim to be reformers.

Actually, the most compelling witnesses for Senator Warren's argument are the two bankers who introduced this adventure in "universal banking" back in the 1990s. They used their political savvy and relentless muscle to seduce Bill Clinton and his so-called New Democrats. John Reed was CEO of Citicorp and led the charge. He has since apologized to the nation. Sandy Weill was chairman of the board and a brilliant financier who envisioned the possibilities of a single, all-purpose financial house, freed of government's narrow-minded regulations. They won politically, but at staggering cost to the country.

Weill confessed error back in 2012: "What we should probably do is go and split up investment banking from banking. Have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail."

John Reed's confession explained explicitly why their modernizing crusade failed for two fundamental business reasons. "One was the belief that combining all types of finance into one institution would drive costs down-and the larger institution the more efficient it would be," Reed wrote in the Financial Times in November. Reed said, "We now know that there are very few cost efficiencies that come from the merger of functions-indeed, there may be none at all. It is possible that combining so much in a single bank makes services more expensive than if they were instead offered by smaller, specialised players."

The second grave error, Reed said, was trying to mix the two conflicting cultures in banking-bankers who are pulling in opposite directions. That tension helps explain the competitive greed displayed by the modernized banking system. This disorder speaks to the current political crisis in ways that neither Dems nor Republicans wish to confront. It would require the politicians to critique the bankers (often their funders) in terms of human failure.

"Mixing incompatible cultures is a problem all by itself," Reed wrote. "It makes the entire finance industry more fragile…. As is now clear, traditional banking attracts one kind of talent, which is entirely different from the kinds drawn towards investment banking and trading. Traditional bankers tend to be extroverts, sociable people who are focused on longer term relationships. They are, in many important respects, risk averse. Investment bankers and their traders are more short termist. They are comfortable with, and many even seek out, risk and are more focused on immediate reward."

Reed concludes, "As I have reflected about the years since 1999, I think the lessons of Glass-Steagall and its repeal suggest that the universal banking model is inherently unstable and unworkable. No amount of restructuring, management change or regulation is ever likely to change that."

This might sound hopelessly naive, but the Democratic Party might do better in politics if it told more of the truth more often: what they tried do and why it failed, and what they think they may have gotten wrong. People already know they haven't gotten a straight story from politicians. They might be favorably impressed by a little more candor in the plain-spoken manner of John Reed.

Of course it's unfair to pick on the Dems. Republicans have been lying about their big stuff for so long and so relentlessly that their voters are now staging a wrathful rebellion. Who knows, maybe a little honest talk might lead to honest debate. Think about it. Do the people want to hear the truth about our national condition? Could they stand it?

http://www.thenation.com/article/hillary-clinton-is-whitewashing-the-financial-catastrophe/

EMichael said in reply to RGC...
"She claims that Glass-Steagall would not have limited the reckless behavior of institutions like Lehman Brothers or insurance giant AIG, which were not traditional banks."

Of course this claim is absolutely true. Just like GS would not have affected the other investment banks, whatever their name was. And just like we would have had to bail out those other banks whatever their name was.

Peter K. said in reply to EMichael...
Can you list all of the pro- or anti- Wall Street "reforms" and actions Bill Clinton performed as President including nominating Alan Greenspan as head regulator? Cutting the capital gains tax? Are you aware of Greenspan's record?

Yes Hillary isn't Bill but she hasn't criticized her husband specifically about his record and seems to want to have her cake and eat it too.

Of course Hillary is much better than the Republicans, pace Rustbucket and the Green Lantern Lefty club. Still, critics have a point.

I won't be surprised if she doesn't do much to rein in Wall Street besides some window dressing.

sanjait said in reply to Peter K....
"Can you list all of the pro- or anti- Wall Street "reforms" and actions Bill Clinton performed..."

That, right there, is what's wrong with Bernie and his fans. They measure everything by whether it is "pro- or anti- Wall Street". Glass Steagall is anti-Wall Street. A financial transactions tax is anti-Wall Street. But neither has any hope of controlling systemic financial risk in this country. None.

You guys want to punish Wall Street but not even bother trying to think of how to achieve useful policy goals. Some people, like Paine here, are actually open about this vacuity, as if the only thing that were important were winning a power struggle.

Hillary's plan is flat out better. It's more comprehensive and more effective at reining in the financial system to limit systemic risk. Period.

You guys want to make this a character melodrama rather than a policy debate, and I fear the result of that will be that the candidate who actually has the best plan won't get to enact it.

likbez said in reply to sanjait...

"You guys want to make this a character melodrama rather than a policy debate, and I fear the result of that will be that the candidate who actually has the best plan won't get to enact it."

You are misrepresenting the positions. It's actually pro-neoliberalism crowd vs anti-neoliberalism crowd. In no way anti-neoliberalism commenters here view this is a character melodrama, although psychologically Hillary probably does has certain problems as her reaction to the death of Gadhafi attests. The key problem with anti-neoliberalism crowd is the question "What is a realistic alternative?" That's where differences and policy debate starts.

RGC said in reply to EMichael...
"Her argument amounts to facile evasion"

Fred C. Dobbs said in reply to RGC...

'The majority favors policies to the left of Hillary.'

Nah. I don't think so.

No, Liberals Don't Control the Democratic Party http://www.theatlantic.com/politics/archive/2014/02/no-liberals-dont-control-the-democratic-party/283653/
The Atlantic - Feb 7, 2014

... The Democrats' liberal faction has been greatly overestimated by pundits who mistake noisiness for clout or assume that the left functions like the right. In fact, liberals hold nowhere near the power in the Democratic Party that conservatives hold in the Republican Party. And while they may well be gaining, they're still far from being in charge. ...

Paine said in reply to RGC...

What's not confronted ? Suggest what a System like the pre repeal system would have done in the 00's. My guess we'd have ended in a crisis anyway. Yes we can segregate the depository system. But credit is elastic enough to build bubbles without the depository system involved

EMichael said in reply to Paine ...

Exactly.

Most people think of lending like the Bailey Brothers Savings and Loan still exists.

RC AKA Darryl, Ron said in reply to EMichael...

Don't be such a whistle dick. Just because you cannot figure out why GLBA made such an impact that in no way means that people that do understand are stupid. See my posted comment to RGC on GLBA just down thread for an more detailed explanation including a linked web article. No, GS alone would not have prevented the mortgage bubble, but it would have lessened TBTF and GS stood as icon, a symbol of financial regulation. Hell, if we don't need GS then why don't we just allow unregulated derivatives trading? Who cares, right? Senators Byron Dorgan, Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin, Richard Bryan, Russ Feingold and Bernie Sanders all voted against GLBA to repeal GS for some strange reason and Dorgan made a really big deal out of it at the time. I doubt everyone on that list of Senators was just stupid because they did not see it your way.

RC AKA Darryl, Ron said in reply to EMichael...
I ran all out of ceteris paribus quite some time ago. Events do not occur in isolation. GLBA increased TBTF in AIG and Citi. TBTF forced TARP. GLBA greased the skids for CFMA. Democrats gained majority, but not filibuster proof, caught between Iraq and a hard place following their votes for TARP and a broader understanding of their participation in the unanimous consent passage of the CFMA, over "objection" by Senators James Inhofe (R-OK) and Paul Wellstone (D-MN). We have had a Republican majority in the House since the 2010 election and now they have the Senate as well. If you are that sure that voters just choose divided government, then aren't we better off to have a Republican POTUS and Democratic Congress?

sanjait said in reply to RC AKA Darryl, Ron...

"I ran all out of ceteris paribus quite some time ago. Events do not occur in isolation. GLBA increased TBTF in AIG and Citi. TBTF forced TARP. GLBA greased the skids for CFMA. "

I know you think this is a really meaningful string that evidences causation, but it just looks like you are reaching, reaching, reaching ...

RC AKA Darryl, Ron said in reply to sanjait...

Maybe. No way to say for sure. It certainly fits the kind of herd mentality that I always saw in corporate Amerika until I retired. The William Greider article posted by RGC was very consistent in its account by John Reed with the details of one or two books written about AIG back in 2009 or so. I don't have time to hunt them up now. Besides, no one would read them anyway.

I am voting for whoever wins the Democratic nomination for POTUS. Bernie without a like-minded Congress would not do much good. But when we shoot each other down here at EV without offering any agreement or consideration that we might not be 100% correct, then that goes against Doc Thoma's idea of an open forum. Granted, with my great big pair then I am willing to state my opinion with no consideration for validation or acceptance, but not everyone has that degree of a comfort zone. Besides, I am so old an cynical that shooting down the overdogs that go after the underdogs is one of the few things that I still care about.

RGC said in reply to Paine ...

GS was one of several actions taken by the New Deal. That it wasn't sufficient by itself doesn't equate to it wasn't beneficial.

RC AKA Darryl, Ron said in reply to RGC...

[Lock and load.]

http://www.occasionalplanet.org/2015/05/13/glass-steagall-one-democratic-senator-who-got-it-right/

Glass-Steagall: Warren and Sanders bring it back into focus

Madonna Gauding / May 13, 2015

Senators Bernie Sanders and Elizabeth Warren are putting a new focus on the Glass-Steagall Act, which was, unfortunately, repealed in 1999 and led directly to the financial crises we have faced ever since. Here's a bit of history of this legislative debacle from an older post on Occasional Planet published several years ago :

On November 4, 1999, Senator Byron Dorgan (D-ND) took to the floor of the senate to make an impassioned speech against the repeal of the Glass-Steagall Act, (alternately known as Gramm Leach Biley, or the "Financial Modernization Act") Repeal of Glass-Steagall would allow banks to merge with insurance companies and investments houses. He said "I want to sound a warning call today about this legislation, I think this legislation is just fundamentally terrible."

According to Sam Stein, writing in 2009 in the Huffington Post, only eight senators voted against the repeal. Senior staff in the Clinton administration and many now in the Obama administration praised the repeal as the "most important breakthrough in the world of finance and politics in decades"

According to Stein, Dorgan warned that banks would become "too big to fail" and claimed that Congress would "look back in a decade and say we should not have done this." The repeal of Glass Steagall, of course, was one of several bad policies that helped lead to the current economic crisis we are in now.

Dorgan wasn't entirely alone. Sens. Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin, Richard Bryan, Russ Feingold and Bernie Sanders also cast nay votes. The late Sen. Paul Wellstone opposed the bill, and warned at the time that Congress was "about to repeal the economic stabilizer without putting any comparable safeguard in its place."

Democratic Senators had sufficient knowledge about the dangers of the repeal of Glass Steagall, but chose to ignore it. Plenty of experts warned that it would be impossible to "discipline" banks once the legislation was passed, and that they would get too big and complex to regulate. Editorials against repeal appeared in the New York Times and other mainstream venues, suggesting that if the new megabanks were to falter, they could take down the entire global economy, which is exactly what happened. Stein quotes Ralph Nader who said at the time, "We will look back at this and wonder how the country was so asleep. It's just a nightmare."

According to Stein:

"The Senate voted to pass Gramm-Leach-Bliley by a vote of 90-8 and reversed what was, for more than six decades, a framework that had governed the functions and reach of the nation's largest banks. No longer limited by laws and regulations commercial and investment banks could now merge. Many had already begun the process, including, among others, J.P. Morgan and Citicorp. The new law allowed it to be permanent. The updated ground rules were low on oversight and heavy on risky ventures. Historically in the business of mortgages and credit cards, banks now would sell insurance and stock.

Nevertheless, the bill did not lack champions, many of whom declared that the original legislation - forged during the Great Depression - was both antiquated and cumbersome for the banking industry. Congress had tried 11 times to repeal Glass-Steagall. The twelfth was the charm.

"Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century," said then-Treasury Secretary Lawrence Summers. "This historic legislation will better enable American companies to compete in the new economy."

"I welcome this day as a day of success and triumph," said Sen. Christopher Dodd, (D-Conn.).

"The concerns that we will have a meltdown like 1929 are dramatically overblown," said Sen. Bob Kerrey, (D-Neb.).

"If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world," said Sen. Chuck Schumer, D-N.Y. "There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive."

Unfortunately, the statement by Chuck Schumer sounds very much like it was prepared by a lobbyist. This vote underscores the way in which our elected officials are so heavily swayed by corporate and banking money that our voices and needs become irrelevant. It is why we need publicly funded elections. Democratic senators, the so-called representatives of the people, fell over themselves to please their Wall Street donors knowing full well there were dangers for the country at large, for ordinary Americans, in repealing Glass-Steagall.

It is important to hold Democratic senators (along with current members of the Obama administration) accountable for the significant role they have played in the current economic crisis that has caused so much suffering for ordinary Americans. In case you were wondering, the current Democratic Senators who voted yes to repeal the Glass-Steagall act are the following:

Daniel Akaka – Max Baucus – Evan Bayh – Jeff Bingaman – Kent Conrad – Chris Dodd – Dick Durbin – Dianne Feinstein – Daniel Inouye – Tim Johnson – John Kerry – Herb Kohl – Mary Landrieu – Frank Lautenberg – Patrick Leahy – Carl Levin – Joseph Lieberman – Blanche Lincoln – Patty Murray – Jack Reed – Harry Reid – Jay Rockefeller – Chuck Schumer – Ron Wyden

Former House members who voted for repeal who are current Senators.

Mark Udall [as of 2010] – Debbie Stabenow – Bob Menendez – Tom Udall -Sherrod Brown

No longer in the Senate, or passed away, but who voted for repeal:

Joe Biden -Ted Kennedy -Robert Byrd

These Democratic senators would like to forget or make excuses for their enthusiastic vote on the repeal of Glass Steagall, but it is important to hold them accountable for helping their bank donors realize obscene profits while their constituents lost jobs, savings and homes. And it is important to demand that they serve the interests of the American people.

*

[The repeal of Glass Steagal was a landmark victory in deregulation that greased the skids for the passage of CFMA once Democrats had been further demoralized by the SCOTUS decision on Bush-v-Gore. The first vote on GLBA was split along party lines, but passed because Republicans had majority and Clinton was willing to sign which was clear from the waiver that had been granted to illegal Citi merger with Travelers. Both Citi and AIG mergers contributed to too big to fail. The CFMA was the nail in the coffin that probably would have never gotten off the ground if Democrats had held the line on the GLBA. Glass-Steagal was insufficient as a regulatory system to prevent the 2008 mortgage crisis, but it was giant as an icon of New Deal financial system reform. Its loss institutionalized too big to fail.]

pgl said in reply to RC AKA Darryl, Ron...

Gramm Leach Biley was a mistake. But it was not the only failure of US regulatory policies towards financial institutions nor the most important. I think that is what Hillary Clinton is saying.

RC AKA Darryl, Ron said in reply to pgl...

It was more symbolic caving in on financial regulation than a specific technical failure except for making too big to fail worse at Citi and AIG. It marked a sea change of thinking about financial regulation. Nothing mattered any more, including the CFMA just a little over one year later. Deregulation of derivatives trading mandated by the CFMA was a colossal failure and it is not bizarre to believe that GLBA precipitated the consensus on financial deregulation enough that after the demoralizing defeat of Democrats in Bush-v-Gore then there was no New Deal spirit of financial regulation left. Social development is not just a series of unconnected events. It is carried on a tide of change. A falling tide grounds all boats.

pgl said in reply to RC AKA Darryl, Ron...

We had a financial dereg craze back in the late 1970's and early 1980's which led to the S&L disaster. One would have thought we would have learned from that. But then came the dereg craziness 20 years later. And this disaster was much worse.

I don't care whether Hillary says 1999 was a mistake or not. I do care what the regulations of financial institutions will be like going forward.

RC AKA Darryl, Ron said in reply to pgl...

I cannot disagree with any of that.

sanjait said in reply to RC AKA Darryl, Ron...

"Deregulation of derivatives trading mandated by the CFMA was a colossal failure and it is not bizarre to believe that GLBA precipitated the consensus"

Yeah, it is kind of bizarre to blame one bill for a crisis that occurred largely because another bill was passed, based on some some vague assertion about how the first bill made everyone think crazy.

RC AKA Darryl, Ron said in reply to sanjait...
Democrats did not vote for GLBA until after reconciliation between the House and Senate bills. Democrats were tossed a bone in the Community Reinvestment Act financing provisions and given that Bill Clinton was going to sign anyway and that Republicans were able to pass the bill without a single vote from Democrats then all but a few Democrats bought in. They could not stop it, so they just bought into it. I thought there was supposed to be an understanding of behaviorism devoted to understanding the political economy. For that matter Republicans did not need Democrats to vote for the CFMA either, but they did. That gave Republicans political cover for whatever went wrong later on. No one with a clue believed things would go well from the passage of either of these bills. It was pure Wall Street driven kleptocracy.
likbez said in reply to sanjait...
It was not one bill or another. It was a government policy to get traders what they want.

See

Bruce E. Woych | August 6, 2013 at 5:45 pm |

http://www.imackgroup.com/mathematics/989981-the-untold-story-brooksley-born-larry-summers-the-truth-about-unlimited-risk-potential/

The Untold Story: Brooksley Born, Larry Summers & the Truth …
http://www.imackgroup.com/mathematics/989981-the-untold-story-brooksley-born-larry...
Oct 5, 2012 … Larry Summers is attempting to re-write history at the expense of … and they might just find one critical point revealed in Mr. Cohan's article.
[PERTINENT EXCERPT]: Oct 5, 2012

"As the western world wakes to the fact it is in the middle of a debt crisis spiral, intelligent voices are wondering how this manifested itself? As we speak, those close to the situation could be engaging in historical revisionism to obfuscate their role in the design of faulty leverage structures that were identified in the derivatives markets in 1998 and 2008. These same design flaws, first identified in 1998, are persistent today and could become graphically evident in the very near future under the weight of a European debt crisis.

Author and Bloomberg columnist William Cohan chronicles the fascinating start of this historic leverage implosion in his recent article Rethinking Robert Rubin. Readers may recall it was Mr. Cohan who, in 2004, noted leverage issues that ultimately imploded in 2007-08.

At some point, market watchers will realize the debt crisis story will literally change the world. They will look to the root cause of the problem, and they might just find one critical point revealed in Mr. Cohan's article.

This point occurs in 1998 when then Commodity Futures Trading Commission (CFTC) ChairwomanBrooksley Born identified what now might be recognized as core design flaws in leverage structure used in Over the Counter (OTC) transactions. Ms. Born brought her concerns public, by first asking just to study the issue, as appropriate action was not being taken. She issued a concept release paper that simply asked for more information. "The Commission is not entering into this process with preconceived results in mind," the document reads.

Ms. Born later noted in, the PBS Frontline documentary on the topic speculation at the CFTC was the unregulated OTC derivatives were opaque, the risk to the global economy could not be determined and the risk was potentially catastrophic. As a result of this inquiry, Ms. Born was ultimately forced from office.

This brings us to Lawrence Summers, the former Treasury Secretary of the United States and at the time right hand man to then Treasury Security Robert Rubin. Mr. Summers was widely credited with implementation of the aggressive tactics used to remove Ms. Born from her office, tactics that multiple sources describe as showing an old world bias against women piercing the glass ceiling.

According to numerous published reports, Mr. Summers was involved in. silencing those who questioned the opaque derivative product's design. "

RC AKA Darryl, Ron said in reply to Paine ...

TBTF on steroids, might as well CFMA - why not?

Bubbles with less TBTF and a lot less credit default swaps would have been a lot less messy going in. Without TARP, then Congress might have still had the guts for making a lesser New Deal.

EMichael said in reply to RC AKA Darryl, Ron...

TARP was window dressing. The curtain that covered up the FED's actions.

pgl said in reply to RGC...

Where have I heard about William Greider? Oh yea - this critique of something stupid he wrote about a Supreme Court decision:

www.washingtonpost.com/news/volokh-conspiracy/wp/2014/06/06/how-many-errors-can-william-greider-make-in-two-sentences-describing-lochner-v-new-york/

pgl said in reply to RGC...

"Exotic financial instruments like derivatives and credit-default swaps flourished, enabling old-line bankers to share in the fun and profit on an awesome scale."

These would have flourished even if Glass-Steagall remained on the books. Leave it to RGC to find some critic of HRC who knows nothing about financial markets.

RGC said in reply to pgl...

Derivatives flourished because of the other deregulation under Clinton, the CFMA. The repeal of GS helped commercial banks participate.

RGC said in reply to pgl...

The repeal of GS helped commercial banks participate.

Fred C. Dobbs said in reply to pgl...

Warren Buffet used to rail about how risky derivative investing is, until he realized they are *extremely* important in the re-insurance biz, which is a
big part of Berkshire Hathaway.

Peter K. said...

http://cepr.net/blogs/beat-the-press/hillary-clinton-bernie-sanders-and-cracking-down-on-wall-street

Hillary Clinton, Bernie Sanders, and Cracking Down on Wall Street
by Dean Baker

Published: 12 December 2015

The New Yorker ran a rather confused piece on Gary Sernovitz, a managing director at the investment firm Lime Rock Partners, on whether Bernie Sanders or Hillary Clinton would be more effective in reining in Wall Street. The piece assures us that Secretary Clinton has a better understanding of Wall Street and that her plan would be more effective in cracking down on the industry. The piece is bizarre both because it essentially dismisses the concern with too big to fail banks and completely ignores Sanders' proposal for a financial transactions tax which is by far the most important mechanism for reining in the financial industry.

The piece assures us that too big to fail banks are no longer a problem, noting their drop in profitability from bubble peaks and telling readers:

"not only are Sanders's bogeybanks just one part of Wall Street but they are getting less powerful and less problematic by the year."

This argument is strange for a couple of reasons. First, the peak of the subprime bubble frenzy is hardly a good base of comparison. The real question is should we anticipate declining profits going forward. That hardly seems clear. For example, Citigroup recently reported surging profits, while Wells Fargo's third quarter profits were up 8 percent from 2014 levels.

If Sernovitz is predicting that the big banks are about to shrivel up to nothingness, the market does not agree with him. Citigroup has a market capitalization of $152 billion, JPMorgan has a market cap of $236 billion, and Bank of America has a market cap of $174 billion. Clearly investors agree with Sanders in thinking that these huge banks will have sizable profits for some time to come.

The real question on too big to fail is whether the government would sit by and let a Goldman Sachs or Citigroup go bankrupt. Perhaps some people think that it is now the case, but I've never met anyone in that group.

Sernovitz is also dismissive on Sanders call for bringing back the Glass-Steagall separation between commercial banking and investment banking. He makes the comparison to the battle over the Keystone XL pipeline, which is actually quite appropriate. The Keystone battle did take on exaggerated importance in the climate debate. There was never a zero/one proposition in which no tar sands oil would be pumped without the pipeline, while all of it would be pumped if the pipeline was constructed. Nonetheless, if the Obama administration was committed to restricting greenhouse gas emissions, it is difficult to see why it would support the building of a pipeline that would facilitate bringing some of the world's dirtiest oil to market.

In the same vein, Sernovitz is right that it is difficult to see how anything about the growth of the housing bubble and its subsequent collapse would have been very different if Glass-Steagall were still in place. And, it is possible in principle to regulate bank's risky practices without Glass-Steagall, as the Volcker rule is doing. However, enforcement tends to weaken over time under industry pressure, which is a reason why the clear lines of Glass-Steagall can be beneficial. Furthermore, as with Keystone, if we want to restrict banks' power, what is the advantage of letting them get bigger and more complex?

The repeal of Glass-Steagall was sold in large part by boasting of the potential synergies from combining investment and commercial banking under one roof. But if the operations are kept completely separate, as is supposed to be the case, where are the synergies?

But the strangest part of Sernovitz's story is that he leaves out Sanders' financial transactions tax (FTT) altogether. This is bizarre, because the FTT is essentially a hatchet blow to the waste and exorbitant salaries in the industry.

Most research shows that trading volume is very responsive to the cost of trading, with most estimates putting the elasticity close to one. This means that if trading costs rise by 50 percent, then trading volume declines by 50 percent. (In its recent analysis of FTTs, the Tax Policy Center assumed that the elasticity was 1.5, meaning that trading volume decline by 150 percent of the increase in trading costs.) The implication of this finding is that the financial industry would pay the full cost of a financial transactions tax in the form of reduced trading revenue.

The Tax Policy Center estimated that a 0.1 percent tax on stock trades, scaled with lower taxes on other assets, would raise $50 billion a year in tax revenue. The implied reduction in trading revenue was even larger. Senator Sanders has proposed a tax of 0.5 percent on equities (also with a scaled tax on other assets). This would lead to an even larger reduction in revenue for the financial industry.

It is incredible that Sernovitz would ignore a policy with such enormous consequences for the financial sector in his assessment of which candidate would be tougher on Wall Street. Sanders FTT would almost certainly do more to change behavior on Wall Street then everything that Clinton has proposed taken together by a rather large margin. It's sort of like evaluating the New England Patriots' Super Bowl prospects without discussing their quarterback.

Syaloch said in reply to Peter K....

Great to see Baker's acknowledgement that an updated Glass-Steagall is just one component of the progressive wing's plan to rein in Wall Street, not the sum total of it. Besides, if Wall Street types don't think restoring Glass-Steagall will have any meaningful effects, why do they expend so much energy to disparage it? Methinks they doth protest too much.

Peter K. said in reply to Syaloch...

Yes that's a good way to look it. Wall Street gave the Democrats and Clinton a lot of campaign cash so that they would dismantle Glass-Steagall. If they want it done, it's probably not a good idea.

EMichael said in reply to Syaloch...

Slippery slope. Ya' gotta find me a business of any type that does not protest any kind of regulation on their business.

Syaloch said in reply to EMichael...

Yeah, but usually because of all the bad things they say will happen because of the regulation. The question is, what do they think of Clinton's plan? I've heard surprisingly little about that, and what I have heard is along these lines: http://money.cnn.com/2015/10/08/investing/hillary-clinton-wall-street-plan/

"Hillary Clinton unveiled her big plan to curb the worst of Wall Street's excesses on Thursday. The reaction from the banking community was a shrug, if not relief."

pgl said in reply to Syaloch...

Two excellent points!!!

sanjait said in reply to Syaloch...

"Besides, if Wall Street types don't think restoring Glass-Steagall will have any meaningful effects, why do they expend so much energy to disparage it? Methinks they doth protest too much."

It has an effect of shrinking the size of a few firms, and that has a detrimental effect on the top managers of those firms, who get paid more money if they have larger firms to manage. But it has little to no meaningful effect on systemic risk.

So if your main policy goal is to shrink the compensation for a small number of powerful Wall Street managers, G-S is great. But if you actually want to accomplish something useful to the American people, like limiting systemic risk in the financial sector, then a plan like Hillary's is much much better. She explained this fairly well in her recent NYT piece.

Paine said in reply to Peter K....

There is absolutely NO question Bernie is for real. Wall Street does not want Bernie. So they'll let Hillary talk as big as she needs to . Why should we believe her when an honest guy like Barry caved once in power

Paine said in reply to Paine ...

Bernie has been anti Wall Street his whole career . He's on a crusade. Hillary is pulling a sham bola

Paine said in reply to Paine ...

Perhaps too often we look at Wall Street as monolithic whether consciously or not. Obviously we know it's no monolithic: there are serious differences

When the street is riding high especially. Right now the street is probably not united but too cautious to display profound differences in public. They're sitting on their hands waiting to see how high the anti Wall Street tide runs this election cycle. Trump gives them cover and I really fear secretly Hillary gives them comfort

This all coiled change if Bernie surges. How that happens depends crucially on New Hampshire. Not Iowa

EMichael said in reply to Paine ...

If Bernie surges and wins the nomination, we will all get to watch the death of the Progressive movement for a decade or two. Congress will become more GOP dominated, and we will have a President in office who will make Hoover look like a Socialist.

Syaloch said in reply to EMichael...

Of course. In politics, as they say in the service, one must always choose the lesser of two evils. https://www.youtube.com/watch?v=e4PzpxOj5Cc

pgl said in reply to EMichael...

You should like the moderate Democrats after George McGovern ran in 1972. I'm hoping we have another 1964 with Bernie leading a united Democratic Congress.

EMichael said in reply to pgl...

Not a chance in the world. And I like Sanders much more than anyone else. It just simply cannot, and will not, happen. He is a communist. Not to me, not to you, but to the vast majority of American voters.

pgl said in reply to EMichael...

He is not a communist. But I agree - Hillary is winning the Democratic nomination. I have only one vote and in New York, I'm badly outnumbered.

ilsm said in reply to Paine ...

I believe Hillary will be to liberal causes after she is elected as LBJ was to peace in Vietnam. Like Bill and Obomber.

pgl said in reply to ilsm...

By 1968, LBJ finally realized it was time to end that stupid war. But it seems certain members in the State Department undermined his efforts in a cynical ploy to get Nixon to be President. The Republican Party has had more slime than substance of most of my life time.

pgl said in reply to Peter K....

Gary Sernovitz, a managing director at the investment firm Lime Rock Partners? Why are we listening to this guy too. It's like letting the fox guard the hen house.

sanjait said in reply to Peter K....

"The piece is bizarre both because it essentially dismisses the concern with too big to fail banks and completely ignores Sanders' proposal for a financial transactions tax which is by far the most important mechanism for reining in the financial industry."

This is just wrong. Is financial system risk in any way correlated with the frequency of transactions? Except for market volatility from HFT ... no. The financial crisis wasn't caused by a high volume of trades. It was caused by bad investments into highly illiquid assets. Again, great example of wanting to punish Wall Street but not bothering to think about what actually works.

Peter K. said...

Robert Reich to the Fed: this is not the time to raise rates.

https://www.facebook.com/video.php?v=1116088268403768

RGC said...

Iceland's Radical Money Plan

Iceland, too, is looking at a radical transformation of its money system, after suffering the crushing boom/bust cycle of the private banking model that bankrupted its largest banks in 2008. According to a March 2015 article in the UK Telegraph:

Iceland's government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled "A better monetary system for Iceland".

"The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy," Prime Minister Sigmundur David Gunnlaugsson said. The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

Under this "Sovereign Money" proposal, the country's central bank would become the only creator of money. Banks would continue to manage accounts and payments and would serve as intermediaries between savers and lenders. The proposal is a variant of the Chicago Plan promoted by Kumhof and Benes of the IMF and the Positive Money group in the UK.

Public Banking Initiatives in Iceland, Ireland and the UK

A major concern with stripping private banks of the power to create money as deposits when they make loans is that it will seriously reduce the availability of credit in an already sluggish economy. One solution is to make the banks, or some of them, public institutions. They would still be creating money when they made loans, but it would be as agents of the government; and the profits would be available for public use, on the model of the US Bank of North Dakota and the German Sparkassen (public savings banks).

In Ireland, three political parties – Sinn Fein, the Green Party and Renua Ireland (a new party) - are now supporting initiatives for a network of local publicly-owned banks on the Sparkassen model. In the UK, the New Economy Foundation (NEF) is proposing that the failed Royal Bank of Scotland be transformed into a network of public interest banks on that model. And in Iceland, public banking is part of the platform of a new political party called the Dawn Party.

December 11, 2015
Reinventing Banking: From Russia to Iceland to Ecuador

by Ellen Brown

http://www.counterpunch.org/2015/12/11/reinventing-banking-from-russia-to-iceland-to-ecuador/

pgl said in reply to RGC...

"Banks would continue to manage accounts and payments and would serve as intermediaries between savers and lenders."

OK but that means they issue bank accounts which of course we call deposits. So is this just semantics? People want checking accounts. People want savings accounts. Otherwise they would not exist. Iceland plans to do what to stop the private sector from getting what it wants?

I like the idea of public banks. Let's nationalize JPMorganChase so we don't have to listen to Jamie Dimon anymore!

sanjait said in reply to pgl...

I don't know for sure (not bothering to search and read the referenced proposals), but I assumed the described proposal was for an end to fractional reserve banking. Banks would have to have full reserves to make loans. Or something. I could be wrong about that.

Syaloch said...

Sorry, but Your Favorite Company Can't Be Your Friend

http://www.nytimes.com/2015/12/13/upshot/sorry-but-your-favorite-company-cant-be-your-friend.html?partner=rss&emc=rss&_r=0

To think that an artificial person, whether corporeal or corporate, can ever be your friend requires a remarkable level of self-delusion.

A commenter on the Times site aptly quotes Marx in response:

"The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound man to his "natural superiors", and has left remaining no other nexus between man and man than naked self-interest, than callous "cash payment". It has drowned the most heavenly ecstasies of religious fervour, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation. It has resolved personal worth into exchange value, and in place of the numberless indefeasible chartered freedoms, has set up that single, unconscionable freedom - Free Trade. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation.

"The bourgeoisie has stripped of its halo every occupation hitherto honoured and looked up to with reverent awe. It has converted the physician, the lawyer, the priest, the poet, the man of science, into its paid wage labourers."

https://www.marxists.org/archive/marx/works/1848/communist-manifesto/ch01.htm

[Dec 12, 2015] David Dayen Is This The Beginning of the Crackup in High-Yield Corporate Debt

Notable quotes:
"... It cuts two ways. Junk ETFs such as JNK and HYG have badly underperformed their benchmarks, owing to buying and selling in an illiquid market to replicate an index. Whereas actively managed junk mutual funds have the flexibility to deviate from index holdings in ways that can add a couple of hundred basis points a year. ..."
"... Your apology is flawed because it assumes equal access to information among investors as well as assuming all investors have the same objective. Institutional investors have different goals than hedge funds for example. The people you refer to have been fleeced that's just ok with you. As to tea leaves the people have been steeped in recovery stories for years. ..."
"... Wait, so speculators are shorting big bond positions of distressed funds? No way, hope they aren't doing this to ETF's. Jeez, didn't see this coming. I guess having the positions of big ETF's published daily might assist the speculators. ..."
"... What I do remember (and I can't remember whether it was Spring of 2008 or earlier), was that HY spreads had gapped out at least a couple of hundred bps, and equities were still at or near all-time highs. I remember sitting in a meeting with a couple I-bankers, who chuckled ruefully "equities haven't a clue". ..."
"... The received wisdom on the Street is that the bond market is smarter than the equity market. And, at last in my career, it was true, at least as far as downturns went. ..."
naked capitalism
MikeNY December 12, 2015 at 6:41 am

Yes, junk is usually the canary in the coal mine. The HY market melted in the Summer of 2008, months before equities noticed what was going on. The question really is how much contagion there will be: how many CDS have been written on the distressed names, who holds them, etc. My instinct tells me that there are considerably less CDS on junk than were written on MBS, due to the smaller market, the lower liquidity and (supposed) credit quality. But how much has that changed since 2008? I dunno.

One thing I do know: it's like the movie "Groundhog Day". The Fed always overstimulates, and there always follows a crash. Are there any bubbles left to blow, to 'reflate' assets next time?

timmy December 12, 2015 at 9:39 am

Your remark on written CDS is important. While it may be difficult to get liquidity on distressed names, it is less so on credit tiers above that or on indices. I'm sure there is some on junk, yes, but the real opportunity for spec CDS is (perhaps, was) on the BBB space which is the largest category in the investment grade market and is more liquid. While it may take awhile for distressed trading to creep up the credit ratings to the larger and more liquid names (specifically, since the definition of liquidity seems to be important on NC: the size of the specific issues' float, approximated with average daily volume), they will also have larger moves because potential fallen angels are repriced aggressively in an unstable market. The other thing about CDS is that they are most often delta-hedged which requires dealers to sell proxy's as the CDS go deeper into the money. The one restraining factor is that once a crisis is in motion, I think its going to be difficult for specs to get more CDS on their books. This strategy is purely directional (this is not an ETF NAV arb), essentially owning out of the money puts with minimal cost of carry.

Jim Haygood December 12, 2015 at 1:39 pm

'Their investing strategy – putting high-risk investments into a mutual fund – seems like exactly what not to do.'

It cuts two ways. Junk ETFs such as JNK and HYG have badly underperformed their benchmarks, owing to buying and selling in an illiquid market to replicate an index. Whereas actively managed junk mutual funds have the flexibility to deviate from index holdings in ways that can add a couple of hundred basis points a year.

That said, both junk ETFs and junk mutual funds are offering daily liquidity, while holding underlying securities that may trade once a week, or have no bids at all. As David Dayen observes, this sets up the risk of a bank run when investors get spooked.

Take a look at the "power dive" chart of TFCIX (Third Avenue Focused Credit Fund) - Aiieeeeee!

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=tfcix&insttype=&freq=&show=

Now the question is contagion. Morningstar shows that 48% of TFCIX's portfolio was below B rating, and 41% had no bond rating. Most junk funds don't have THAT ugly a portfolio. But when the herd starts to stampede, fine distinctions can get lost in the dust cloud from the thundering hooves.

Over to you, J-Yel. Do you feel lucky, cherie? Well, do you?

Mike Sparrow December 12, 2015 at 3:48 pm

There is no CDS. There just isn't less, there is none. The stock market has pretty much ignored it as well except that its move from 13000 to 18000 has temporarily stalled. I suspect by the spring, this will be old news.

I think we make errors here, not understanding this particular type of financial speculation is "anti-growth" in general. This would probably blow most of the minds on this board.

Keith December 12, 2015 at 7:27 am

Many years ago when Alan Greenspan first proposed using monetary policy to control economies, the critics said this was far too broad a brush.

After the dot.com crash Alan Greenspan loosened monetary policy to get the economy going again. The broad brush effect stoked a housing boom.

When he tightened interest rates, to cool down the economy, the broad brush effect burst the housing bubble. The teaser rate mortgages unfortunately introduced enough of a delay so that cause and effect were too far apart to see the consequences of interest rate rises as they were occurring.

The end result 2008.

With this total failure of monetary policy to control an economy and a clear demonstration of the broad brush effect behind us, everyone decided to use the same idea after 2008.

Interest rates are at rock bottom around the globe, with trillions of QE pumped into the global economy.

The broad brush effect has blown bubbles everywhere.

"9 August 2007 – BNP Paribas freeze three of their funds, indicating that they have no way of valuing the complex assets inside them known as collateralised debt obligations (CDOs), or packages of sub-prime loans. It is the first major bank to acknowledge the risk of exposure to sub-prime mortgage markets. Adam Applegarth (right), Northern Rock's chief executive, later says that it was "the day the world changed"

10th December 2015 – "Moments ago, we learned courtesy of the head of Mutual Fund Research at Morningstar, Russ Kinnel, that the next leg of the junk bond crisis has officially arrived, after Third Avenue announced it has blocked investor redemptions from its high yield-heavy Focused Credit Fund, which according to the company has entered a "Plan of Liquidation" effective December 9."
When investor's can't get their money out of funds they panic.

Central Bank low interest rate policies encourage investors to look at risky environments to get a reasonable return

Pre-2007 – Sub-prime based complex financial instruments
Now – Junk bonds

The ball is rolling and the second hedge fund has closed its doors, investors money is trapped in a world of loss.

"Here Is "Gate" #2: $1.3 Billion Hedge Fund Founded By Ex-Bear Stearns Traders, Just Suspended Redemptions"

We know the world is downing in debt and Greece is the best example I can think of that shows the reluctance to admit the debt is unsustainable.

Housing booms and busts across the globe ……

Those bankers have saturated the world with their debt products.

Keith December 12, 2015 at 7:29 am

Links (which will probably require moderation)

Skippy December 12, 2015 at 7:41 am

Quality of instruments impaired by corruption has a more deleterious effect than quantities of could ever imagine…

David December 12, 2015 at 10:33 am

"Those bankers have saturated the world with their debt products."

I'm no apologist for Banksters but people bought this "stuff" as the Stuffies.

whether you call it greed or desperation in the face of zero yield – at the end of the day the horizon was short since the last debacle.

getting 2 & 20 or whatever the comp arrangement was for those who are motivated by greed – 2% of $2 Billion yields at least $40 million a year for 5 years or $200 million – not bad for ten guys or less – obviously not fiduciaries – bouncing from Bear to Tudor to Third Ave with no change in the model yields predictable results

I put forth the proposition the "people" deserve their fate – the tea leaves were all there to see

tegnost December 12, 2015 at 10:52 am

Your apology is flawed because it assumes equal access to information among investors as well as assuming all investors have the same objective. Institutional investors have different goals than hedge funds for example. The people you refer to have been fleeced that's just ok with you. As to tea leaves the people have been steeped in recovery stories for years.

Ian December 12, 2015 at 2:24 pm

Also fails to recognize the collateral damage caused towards the people that did not directly participate. It is very hard to say that they deserve their fate in this context, in that they were largely powerless to stop it to begin with, at a reasonable level.

Ian December 12, 2015 at 2:29 pm

I guess you qualified that with focusing solely on the people who bought it. Did not read fully.

Timmy December 12, 2015 at 8:34 am

Wait, so speculators are shorting big bond positions of distressed funds? No way, hope they aren't doing this to ETF's. Jeez, didn't see this coming. I guess having the positions of big ETF's published daily might assist the speculators.

Jim Haygood December 12, 2015 at 4:25 pm

Yesterday HYG closed at a 0.76% discount to NAV, while JNK closed at a 0.68% discount (values from Morningstar). These are wider discounts than ETF managers like to see.

The arbitrage mechanism of buying the discounted ETF shares, redeeming them for the underlying, and then selling the bonds at full value for an instant 0.76% gain is supposed to kick in now.

But sell … to whom?

Timmy December 12, 2015 at 4:51 pm

The misperception is that the ETF junk trade is an arb right now. Its not, its directional. The discipline to bring NAV's in line with underlying value will only kick in at much wider levels because traders are still long (and putting on more of) the "widener" because they anticipate higher levels of vol going forward.

tegnost December 12, 2015 at 9:15 am

Actually have already been bracing myself as demand for labor fell off a cliff at the end of sept., and I'm guessing it's stories such as this that makes my customers tighten their belts....

nat scientist December 12, 2015 at 9:55 am

"Some say the world will end in fire
Some say in ice
From what I've tasted of desire
I hold with those who favor (fire) INFLATION
But if it had to (perish) REFINANCE twice,
I think I know enough of (hate) ZIRP RATES
To say that for destruction (ice) NO BID
Is also great
And would suffice."

Marty Whitman now gets Robert Frost.

craazyboy December 12, 2015 at 4:26 pm

All those junk companies could just declare bankruptcy and start over. That's the way it's supposed to work. Just ask The Donald. Then it would be like that movie where Bruce Willis saved the earth from an asteroid strike. 'Course there was only one asteroid in that movie. Instead, we have World War Z with zombies all over the place!

But maybe JYell will buy all the junk bonds, burn them, and then the dollar will crash and we can all get jobs?

Christer Kamb December 12, 2015 at 1:44 pm

MikeNY said;

"The HY market melted in the Summer of 2008, months before equities noticed what was going on."

Not really. HYG market were in a downtrend during summer of 2007, together with the stockmarket. Also in the 2008 summer both markets were in a severe meltdown. This time around the HYG´s started their downtrend from summer 2014 with the 1:st leg down to dec same year. 2:nd leg is now running in which the stockmarket joined.

Your right, HYG´s seems to be the canaries here! But, from august this year they seems to go in different directions. Or are they?

MikeNY December 12, 2015 at 4:25 pm

You're right, it was earlier than Summer 2008, now I think about it.

What I do remember (and I can't remember whether it was Spring of 2008 or earlier), was that HY spreads had gapped out at least a couple of hundred bps, and equities were still at or near all-time highs. I remember sitting in a meeting with a couple I-bankers, who chuckled ruefully "equities haven't a clue".

The received wisdom on the Street is that the bond market is smarter than the equity market. And, at last in my career, it was true, at least as far as downturns went.

[Dec 12, 2015] Robert Reich to the Fed: this is not the time to raise rates

Notable quotes:
"... Within days the Fed will begin hiking interest rates in an effort to prevent inflation. This is nuts. There's no sign of dangerous inflation anywhere. Raising rates will just slow the economy, making it harder for people to find jobs. The share of working-age people in jobs is near a 40-year low. Watch our video to find out what this is all about -- and how it will affect you. ..."
www.facebook.com

Robert Reich

Within days the Fed will begin hiking interest rates in an effort to prevent inflation. This is nuts. There's no sign of dangerous inflation anywhere. Raising rates will just slow the economy, making it harder for people to find jobs. The share of working-age people in jobs is near a 40-year low. Watch our video to find out what this is all about -- and how it will affect you.

Dwight McCabe

According to Paul Krugman the banks desperately need rates higher so they make more profits. With these very low rates they are stuck in low profit. The Fed lives in the financial culture and all the learned people around them, bankers, are convinced that the economy needs higher rates. The economy will not benefit but the financial community sure will.

David Van Dyne

...By the way, how about the negative returns on money market funds invested through a 401(k) plan?

[Dec 12, 2015] The American middle class is now matched in number by those in the economic tiers above and below it

Notable quotes:
"... I would merely point out that the out-of-touch elite is not confined to the Republican Party. There are substantial elements within the Brookings-Third Way wing of the Democratic coalition that would rather cut Social Security than establish a sensible retirement-income system, and that would rather cut Medicare than improve the efficiency of health care finance and delivery, after all. ..."
"... Why a one-percentage-point rise in the GDP share of Social Security is something that calls in any technocratic sense for cuts to the Social Security system is something that eludes me. What cutting Social Security has to do with reducing poverty eludes me. But it is something that all fifteen of the authors thought was so obvious as to require no explanation or justification whatsoever... ..."
Economist's View

Links for 12-12-15

Syaloch said in reply to anne...

In other news, here at home we're shrinking too.

http://www.pewsocialtrends.org/2015/12/09/the-american-middle-class-is-losing-ground/

The American Middle Class Is Losing Ground
No longer the majority and falling behind financially

After more than four decades of serving as the nation's economic majority, the American middle class is now matched in number by those in the economic tiers above and below it. In early 2015, 120.8 million adults were in middle-income households, compared with 121.3 million in lower- and upper-income households combined, a demographic shift that could signal a tipping point, according to a new Pew Research Center analysis of government data.

Peter K. said...

I don't believe I've seen DeLong talk this way before. He and Krugman often focus on the Republicans or the European VSPs, with good reason.

But if Hillary doesn't move the ball down the field despite Republican opposition, increasing inequality will make politics worse and worse.

http://www.bradford-delong.com/2015/12/live-from-evans-hall-i-would-merely-point-out-that-the-out-of-touch-elite-is-not-confined-to-the-republican-party-ther.html

Live from Evans Hall: I would merely point out that the out-of-touch elite is not confined to the Republican Party. There are substantial elements within the Brookings-Third Way wing of the Democratic coalition that would rather cut Social Security than establish a sensible retirement-income system, and that would rather cut Medicare than improve the efficiency of health care finance and delivery, after all.

As all of the authors of the Brookings-AEI joint "consensus plan for reducing poverty and restoring the American dream" write:

there are reasonable ways both to cut spending and to raise revenue that are consistent with our core values. For example, Social Security spending is projected to consume over one percentage point more of national income in 2040 than it does today...

Why a one-percentage-point rise in the GDP share of Social Security is something that calls in any technocratic sense for cuts to the Social Security system is something that eludes me. What cutting Social Security has to do with reducing poverty eludes me. But it is something that all fifteen of the authors thought was so obvious as to require no explanation or justification whatsoever...

Paul Krugman: Empowering the Ugliness: "The story is quite different in America...

Continue reading "" "

[Dec 11, 2015] Dangers of reaching for yield

The quest for yield is pushing investors into risk in a frantic hunt for yield in an environment where risk free assets yield at best an inflation adjusted zero and at worst have a negative carrying cost. Add to this fake earnings and share repurchases that weaken many companies including such stalwart as IBM and you get the message.
Notable quotes:
"... A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals while it liquidates its high-yield bond fund, an unusual move that highlights the severity of the months long junk-bond plunge that has swept Wall Street. ..."
"... All 30 of the largest high-yield bond funds tracked by Morningstar have lost money this year, reflecting price declines as investors shied away from risk. ..."
"... "Investors have been dazzled that yields on bonds have climbed so high, even while default rates remained low," said Martin Fridson, founder of Lehmann Livian Fridson Advisors and a longtime junk-bond analyst. "Currently, though, the ability to sell a large position is especially poor…. When that tension gets especially high, you can see something snap." ..."
"... Speculation by retail investors in high risk instruments like high yield bonds, oil ETN funds (based off oil futures), gold funds, etc rose tremendously during ZIPR period. Probably several billions were lost by retail investors during this period in search for yield. The same is true about participation of retail investors in regular casino games such as stock funds and indexes like S&P500. ..."
economistsview.typepad.com

BenIsNotYoda said... Friday, December 11, 2015 at 03:42 AM

Another leg of the reach-for-yield/carry trade crumbling. Emerging markets, commodities and now corporate high yield. No bubbles here. Carry on.

http://www.wsj.com/articles/as-high-yield-debt-reels-mutual-fund-blocks-holders-from-redeeming-1449767526

Junk Fund's Demise Fuels Concern Over Bond Rout

Third Avenue Focused Credit Fund takes rare step, seeking an orderly liquidation as junk-bond market swoons

A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals while it liquidates its high-yield bond fund, an unusual move that highlights the severity of the months long junk-bond plunge that has swept Wall Street.

The decision by Third Avenue Management LLC means investors in the $789 million Third Avenue Focused Credit Fund may not receive all their money back for months, if not more.

BenIsNotYoda said in reply to BenIsNotYoda...
of course, biotech has to be added to this list; down 20%.
pgl said in reply to BenIsNotYoda...
Amgen shares trading at $145 and Gilead shares trading at $102. Not feeling sorry for these dudes.
pgl said in reply to BenIsNotYoda...
Talk about burying the lead:

"The yield spread between junk-rated debt and U.S. Treasurys narrowed to a multiyear low in mid-2014, reflecting investors' confidence in companies' business prospects. But spreads have since risen, reflecting lower prices, as the energy bust intensified questions about junk-rated companies' ability to repay debts. All 30 of the largest high-yield bond funds tracked by Morningstar have lost money this year, reflecting price declines as investors shied away from risk.

"Investors have been dazzled that yields on bonds have climbed so high, even while default rates remained low," said Martin Fridson, founder of Lehmann Livian Fridson Advisors and a longtime junk-bond analyst. "Currently, though, the ability to sell a large position is especially poor…. When that tension gets especially high, you can see something snap."

The Securities and Exchange Commission has been warning mutual-fund managers who purchase illiquid securities-those that may be difficult to buy or sell at stated prices because of a lack of willing investors-to prepare better for potential redemptions and is drawing up new rules requiring such measures."

Simply put - people who go into the junk bond market get a very high return but they also take the risk. No feeling sorry for these guys especially given that the SEC gave them fair warning.

Peter K. said in reply to pgl...
"All 30 of the largest high-yield bond funds tracked by Morningstar have lost money this year, reflecting price declines as investors shied away from risk."

Investors are shying away from risk? I thought ZIRP encouraged reach-for-yield.

The market goes up and down. Only drama queens would see a bubble like the tech stock bubble or housing bubble in the data.

http://cepr.net/blogs/beat-the-press/matt-o-brien-takes-obama-to-task-on-fed-appointees

Dean Baker again:

"Preventing the rebirth of housing bubbles in these markets was a very good thing in my book. I will add the qualification that high interest rates is not my preferred way of bursting bubbles. The first recourse should be talk, as in using the Fed's bully pulpit, coupled with its research, to warn the markets of rising bubbles. Janet Yellen did this successfully in the summer of 2014 when she used congressional testimony to warn of bubbles in social media companies, biotech stocks, and junk bonds. She did not follow through with subsequent warnings, but all three markets did take a hit in the weeks following her testimony.

For some reason most economists reject the idea of having the Fed talk down bubbles. I guess it is considered impolite. This seems more than a bit bizarre given the enormous damage done by bursting bubbles compared with the virtually costless effort to talk them down.

Of course the Fed also has substantial regulatory powers which can be used to curb bank lending to support bubbles. This is also a policy option that should be pursued before deliberately slowing the economy with higher interest rates.

Anyhow, I was not happy to see the economy slowed by the Taper Tantrum, but I was very happy to see that it prevented the growth of another bubble. It is unfortunate that almost no one knows this story - I guess it is difficult for reporters to get access to the Case-Shiller data on the web."

pgl said in reply to Peter K....
"The market goes up and down. Only drama queens would see a bubble like the tech stock bubble or housing bubble in the data."

Yep! And the lack of QE of late has driven up both government bond rates and credit spreads. Now wonder these vulture investors lost money. I'm not feeling for them a bit. And yes - BenIsNotYoda was being a drama queen.

likbez said in reply to Peter K....
"Investors are shying away from risk? I thought ZIRP encouraged reach-for-yield."

Yes, very true.

Speculation by retail investors in high risk instruments like high yield bonds, oil ETN funds (based off oil futures), gold funds, etc rose tremendously during ZIPR period. Probably several billions were lost by retail investors during this period in search for yield. The same is true about participation of retail investors in regular casino games such as stock funds and indexes like S&P500.

Conservative investments like TIPS suffered.

[Dec 11, 2015] Demand, Supply, and what is new after 2008

Notable quotes:
"... Robert Waldmann writes that that the reason Krugman was surprised by the failure of the supply side is that he didn't pay enough attention to the European unemployment problem. The natural unemployment rate hypothesis failed spectacularly in Europe in the 1980s. Extremely high unemployment did not lead to deflation - rather it coexisted with moderate inflation for a long time, then with low inflation. By 2008, the flat Phillips curve was already very clear to anyone who read Italian newspapers. ..."
angrybearblog.com
Angry Bear

... ... ...

The natural unemployment rate hypothesis failed spectacularly in Europe in the 1980s. Extremely high unemployment did not lead to deflation - rather it coexisted with moderate inflation for a long time, then with low inflation.

Krugman posted a graph showing how the US graph of inflation and unemployment has changed (just click the link and look). In the past high unemployment gradually lead to lower inflation and then to lower inflation and unemployment - this is the pattern predicted by Friedman, Phelps, Tobin (and discussed already by Samuelson and Solow in 1960). But in the recent past extremely high unemployment has come with low and stable core inflation.

Things used look very different here in Italy than in the USA. Here is a graph of data from before January 2008. Extremely high unemployment was consistent with moderate and then with low inflation. The only clear shift in inflation occurred in 1996 and 1997 (which may or may not be when Italians began to think they might actually earn the wonderful reward of being allowed to adopt the Euro).

filipograph

By 2008, The flat Phillips curve (the Fillipo curve?) was already very clear to anyone who read Italian newspapers.

Here are all data which are available on FRED (yes I sit in Rome and surf to St Louis for Italian data). Oddly the harmonized unemployment series is only available (at FRED) from 1983 on.

filipo2

In this graph there is also very little sign of Friedman-Phelps cycles. The old pattern was a steady decline from extremely high inflation - it looks almost like an expectations unaugmented Phillips curve. But then (really from 1986 on) there was fairly stable moderate to low inflation along with extreme swings in unemployment. I stress that this is CPI inflation including food and energy not core inflation. the peak oil spike in 2007 and the collapse in 2008 are clearly visible. It is possible that the most recent observations show a slide to actual persistent deflation, but it is more likely that the recent decline in inflation is due to the collapse of the price of oil.

Unlearning economic paradigms | Bruegel , November 30, 2015 7:22 am

[…] Robert Waldmann writes that that the reason Krugman was surprised by the failure of the supply side is that he didn't pay enough attention to the European unemployment problem. The natural unemployment rate hypothesis failed spectacularly in Europe in the 1980s. Extremely high unemployment did not lead to deflation - rather it coexisted with moderate inflation for a long time, then with low inflation. By 2008, the flat Phillips curve was already very clear to anyone who read Italian newspapers. […]

[Dec 11, 2015] Why Its Tricky for Fed Officials to Talk Politically

"There is no reason for central banks to have the kind of independence that judicial institutions have. Justice may be blind and above politics, but money and banking are not." Economic and politics are like Siamese twins (which actually . If somebody trying to separate them it is a clear sign that the guy is either neoliberal propagandists or outright crook.
Notable quotes:
"... I think FED chairman is the second most powerful political position in the USA after the POTUS. Or may be in some respects it is even the first ;-) So it is quintessentially high-power political position masked with the smokescreen of purely economic (like many other things are camouflaged under neoliberalism.) ..."
"... I think that is a hidden principle behind attacks on FED chair. A neoliberal principle that the state should not intrude into economics and limit itself to the police, security, defense, law enforcement and few other related to this functions. So their point that she overextended her mandate is an objection based on principle. Which can be violated only if it is used to uphold neoliberalism, as Greenspan did during his career many times. ..."
"... This kind of debate seems to be a by-product of the contemporary obsession with having an independent central bank, run according to the fantasy that there is such a thing as a neutral or apolitical way to conduct monetary policy. ..."
"... A number of commenters and authors have recently pointed out that inequality may not just be an unrelated phenomenon to monetary policy, but actually, in part at least, a byproduct of it. ..."
"... The theory is that the Fed in the Great Moderation age has been so keen to stave off even the possibility of inflation that it chokes down the vigor of recoveries before they get to the part where median wages start rising quickly. The result is that wages get ratcheted down with the economic cycle, falling during recessions and never fully recovering during the recoveries. ..."
"... Two Things: (i) The Fed should be open and honest about monetary policy. No one wants to return to the Greenspan days. (ii) Brad Delong is a neoliberal hack. ..."
"... As to why risk a political backlash in the piece, the short answer is: to invoke the debate on whether politics or fact (science) is going to dominate. Because they can't both. See: Romer. Let's have this out once and for all. ..."
Dec 11, 2015 | Economist's View
anne said...
Fine column, with which I agree. Federal Reserve policy as such is difficult and contentious enough to avoid wandering to social-economic analysis or philosophy from aspects of the Fed mandate.

As for the use of the word "hack" in referring to Janet Yellen, that needlessly insulting use was by a Washington Post editor and not by columnist Michael Strain.

anne -> RW (the other)...

As Brad notes, many Fed Chairs before Yellen have opined on matters outside monetary policy so why is Yellen subject to a different standard?

[ Fine, I have reconsidered and agree. No matter how the headline was written, the headline was meant to be intimidating and was willfully mean and that could and should have been made clear immediately by the writer of the column. ]

likbez -> anne...

"Federal Reserve policy as such is difficult and contentious enough to avoid wandering to social-economic analysis or philosophy from aspects of the Fed mandate."

Anne,

I think FED chairman is the second most powerful political position in the USA after the POTUS. Or may be in some respects it is even the first ;-) So it is quintessentially high-power political position masked with the smokescreen of "purely economic" (like many other things are camouflaged under neoliberalism.)

That's why Greenspan got it, while being despised by his Wall-Street colleagues...

He got it because he was perfect for promoting deregulation political agenda from the position of FED chair.

pgl -> likbez...

Greenspan was despised on Wall Street? Wow as he tried so hard to serve their interests. I guess the Wall Street crowd is never happy no matter how much income we feed these blow hards.

anne -> likbez...

So it is quintessentially high-power political position masked with the smokescreen of "purely economic" (like many other things are camouflaged under neoliberalism.)

[ I understand, and am convinced. ]

Peter K. said...

I respectfully disagree. Republicans are always working the refs and despite what the writer from AEI said, they're okay with conservative Fed chairs talking politics. They have double standards.

Greenspan testified to Congress on behalf of Bush's tax cuts for the rich. Something about how since Clinton balanced the budget, the financial markets had too little safe debt to work with. (maybe that's why they dove into mortgaged-backed securities). But tax cuts versus more government spending? He and Rubin advised Clinton to drop his middle class spending bill and trade deficit reduction for lower interest rates. That's economics which have political outcomes.

So if the rightwing is going to work the the refs, so should the left. We shouldn't unilaterally disarm over fears Congress will gun for the Fed. There should be more groups like Fed Up protesting.

The good thing about Yellen's speech is that it's a signal to progressives that inequality is problem for her even as she is raising rates in a political dance with hawks and Congress.

The Fed is constantly accused of increasing inequality so it's good Yellen is saying she thinks it's a bad thing and not American.

Bernie Sanders is right that for change to happen we'll need more political involvement from regular citizens. We'll need a popular movement with many leaders.

The Fed should be square in the sights of a progressive movement. A high-pressured economy with full employment should be a top priority.

Instead I saw Nancy Pelosi being interviewed by Al Hunt on Charlie Rose the other night. Hunt asked her about Yellen raising rates.

Pelosi said no comment as she wasn't looking at the data Yellen was and didn't want to interfere. The Fed should be independent, etc. Perhaps like Thoma she has the best of motives and doesn't want to motivate the Republicans to go after the Fed and oppose what she wants.

Still I felt the Democratic leadership should be committed to a high-pressure economy. Her staff should know what Krugman, Summers etc are saying. What the IMF and World Bank are sayings.

She should have said "they shouldn't raise rates until they see the whites of inflation's eyes" as Krugman memorably put it. She should have said that emphatically.

We need a Democratic Party like that.

Instead Peter Diamond is blocked from becoming a Fed governor by Republicans and Pelosi is afraid to comment on monetary policy.

Peter K. -> Peter K....

A longer reply from DeLong:

http://www.bradford-delong.com/2015/12/must-read-i-would-beg-the-highly-esteemed-mark-thoma-to-draw-a-distinction-here-between-inappropriate-and-unwise-in-m.html

Must-Read: I would beg the highly-esteemed Mark Thoma to draw a distinction here between "inappropriate" and unwise. In my view, it is not at all inappropriate for Fed Chair Janet Yellen to express her concern about excessive inequality. Previous Fed Chairs, after all, have expressed their liking for inequality as an essential engine of economic growth over and over again over the past half century--with exactly zero critical snarking from the American Enterprise Institute for trespassing beyond the boundaries of their role.

But that it is not inappropriate for Janet Yellen to do so does not mean that it is wise. Mark's argument is, I think, that given the current political situation it is unwise for Janet to further incite the ire of the nutboys in the way that even the mildest expression of concern about rising inequality will do.

That may or may not be true. I think it is not.

But I do not think that bears on my point that Michael R. Strain's arguments that Janet Yellen's speech on inequality was inappropriate are void, wrong, erroneous, inattentive to precedent, shoddy, expired, expired, gone to meet their maker, bereft of life, resting in peace, pushing up the daisies, kicked the bucket, shuffled off their mortal coil, run down the curtain, and joined the bleeding choir invisible:

Mark Thoma: Why It's Tricky for Fed Officials to Talk Politically: "I think I disagree with Brad DeLong...

pgl -> Peter K....

"my point that Michael R. Strain's arguments that Janet Yellen's speech on inequality was inappropriate are void, wrong, erroneous..."

DeLong is exactly right here. Strain's argument has its own share of partisan lies whereas Yellen is telling the truth. Brad will not be intimidated by this AEI weasel.

sanjait said...

Why would Yellen not talk about inequality? It's an important macroeconomic topic and one that is relevant for her job. It's both an input and an output variable that is related to monetary policy.

And, arguably I think, median wage growth should be regarded as a policy goal for the Fed, related to its explicit mandate of "maximum employment."

But even if you think inequality is unrelated to the Fed's policy goals, that doesn't stop them from talking about other topics. Do people accuse the Fed of playing politics when they talk about desiring reduced financial market volatility? That has little to do with growth, employment and general price stability.

likbez -> sanjait...

I think that is a hidden principle behind attacks on FED chair. A neoliberal principle that the state should not intrude into economics and limit itself to the police, security, defense, law enforcement and few other related to this functions. So their point that she overextended her mandate is an objection based on principle. Which can be violated only if it is used to uphold neoliberalism, as Greenspan did during his career many times.

Sandwichman said...

I think I disagree with Mark Thoma's disagreement with Brad DeLong. Actually, ALL economic discourse is political and efforts to restrain the politics are inevitably efforts to keep the politics one-sided

Dan Kervick said...

This kind of debate seems to be a by-product of the contemporary obsession with having an "independent" central bank, run according to the fantasy that there is such a thing as a neutral or apolitical way to conduct monetary policy.

But there really isn't. Different kinds of social, economic and political values and policy agendas are going to call for different kinds monetary and credit policies. It might be better for our political health if the Fed were administratively re-located as an executive branch agency that is in turn part of a broader Department of Money and Banking - no different from the Departments of Agriculture, Labor, Education, etc. In that case everybody would then view Fed governors as ordinary executive branch appointees who report to the President, and whose policies are naturally an extension of the administration's broader agenda. Then if people don't like the monetary policies that are carried out, that would be one factor in their decision about whom to vote for.

There is no reason for central banks to have the kind of independence that judicial institutions have. Justice may be blind and above politics, but money and banking are not. Decisions in that latter area should be no more politics-free than decisions about taxing and spending. If we fold the central bank more completely into the regular processes of representative government, then if a candidate wants to run on a platform of keeping interest rates low, small business credit easy, bank profits small, etc., they could do so without all of the doubletalk about the protecting the independence of the sacrosanct bankers' temple.

We could also then avoid unproductive wheel-spinning about that impossibly vague and hedged Fed mandate that can be stretched to mean almost anything people want it to mean. The Fed's mandate under the political solution would just be whatever monetary policy the President ran on.

likbez -> Dan Kervick...

"The Fed's mandate under the political solution would just be whatever monetary policy the President ran on"

Perfect !

Actually sanjait in his post made a good point why this illusive goal is desirable (providing "electoral advantage") although Greenspan probably violated this rule. A couple of hikes of interest rates from now till election probably will doom Democrats.

Also the idea of FEB independence went into overdrive since 80th not accidentally. It has its value in enhancing the level of deregulation.

Among other things it helps to protect large financial institutions from outright nationalization in cases like 2008.

Does somebody in this forum really think that Bernanke has an option of putting a couple of Wall-Street most violent and destructive behemoths into receivership (in other words nationalize them) in 2008 without Congress approval ?

Dan Kervick -> Sanjait ...

Sanjait, with due respect, you are not really responding to the reform proposal, but only affirming the differences between that proposal and the current system.

Yes, of course fiscal policy is "constrained" by Congress. Indeed, it is not just constrained by Congress but actually made by Congress, subject only to an overridable executive branch veto. The executive branch is responsible primarily for carrying out the legislature's fiscal directives. That's the point. In a democratic system decisions about all forms of taxation and government spending are supposed to be made by the elected legislative branch, and then executed by agencies of the executive branch. My proposal is that monetary policy should be handled in the same way: by the elected political branches of the government.

You point out that under current arrangements, central banks can, if they choose, effect large monetary offsets to fiscal policy (or at least to some of the aggregate macroeconomic effects of those policies). I don't understand why any non-elected and politically unaccountable branch of our government should have the power to offset the policies of the elected branches in this way. Fiscal and monetary policy need to be yoked together to achieve policy ends effectively. Those policy ends should be the ones people vote for, not the ones a handful of men and women happen to think are appropriate.

JF -> Dan Kervick...

"In a democratic system" is what you wrote.

It is more proper to refer to it as republicanism. The separation of powers doctrine, underlying the US constitution, is a reflection of James Madison's characterization in the 51st The Federalist Paper, and it is a US-defined republicanism that is almost unique:

"the republican form, wherein the legislative authority necessarily predominates."

- or something like that is the quote.

In the US framers' view, at least those who constructed the re-write in 1787 and were the leaders - I'd say the most important word in Madison's explanation is the word "necessarily" - this philosophy has all law and policy stemming from the public, it presumes that you can't have stability and dynamic change of benefit to society without this.

Arguably, aristocracies, fascists, totalitarians, and all the other isms, just don't see it that way, they see things as top-down ordering of society.

The mythology of the monetary theorizing and the notions about a central bank being independently delphic has some of this top-down ordering view to it (austerianism, comes to mind). Well, I don't believe in a religious sense that this is how it should be, nor do you it seems.

It will be an interesting Congress in 2017 when new legislative authorities are enacted to establish clearer framing of the ministerial duties now held by the FRB.

Are FED officials scared that this will happen, and as a result they circle the wagons with their associates in the financial community now to fend off the public????

I hope this is not true. They can allay their own fears by leading not back toward 1907, in my opinion.

Of course, I could say where I'd like economic policies to go, and do here often, but this thread is about Yellin and other FED officials.

I recognize that FRB officials can say things too, and should, as leaders of this nation (with a whole lot of research power and evidence available to them their commentary on political economics should have merit and be influential).

Thanks for continuing to remind people that we govern ourselves in the US in a US-defined republican-form. But I think the people still respect and listen to leadership - so speak out FED officials.

JF -> Dan Kervick...

But Dan K, then you'd de-mythologize an entire wing of macroeconomics in a wing referred to as monetary theory based on a separate Central Bank, or some non-political theory of money.

Don't mind the theory as it is an analytic framework that questions and sometimes informs - but it is good to step back and realize some of the religious-like framing.

It is political-economy.

Peter K. -> pgl...

Yellen really lays it out in her speech.

"The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.2 It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity."

And even links to Piketty in footnote 42.

"Along with other economic advantages, it is likely that large inheritances play a role in the fairly