Relentlessly Progressive Political Economy

REPRINT: Given where we are now I thought this might be worth a reread. It was written last march of this year.  It is like I was clairvoyant back then: paragraph two three and four.

Travis Fast

March 2008

This post was stimulated by Andrew Jackson’s post today

There is by now a broad consensus that the problems in the sub-prime sector were intimately linked with, on the one hand, a gush of global liquidity caused by too many investors seeking too few outlets and exacerbated by low interest rates and on the other hand, by demand underwritten by a property bubble and a deluge of consumer credit–again underwritten by low interest rates.

All of this points to the fatal flaw at the heart of, what for lack of better term I will call, «the neoliberal growth model». Namely that it is premised on the continual expansion of consumer demand at a pace that exceeds wage growth. At some point workers were going to get over leveraged and at that point a vicious cycle had to set in. We have only seen the collapse of housing thus far (in the US and starting in the UK) but there is an equal if not greater tranche of bad consumer debt floating around.

When the ‘public’ i.e., the state steps in to underwrite all this bad debt, which they have already begun in the US, we are going to see the (re)nationalisation of private debt of all kinds. This would in effect mark-off the end of the privatisation of national debt onto the backs of workers as individuals but not collectively as tax payers.

In the short term, therefore, it seems key that we would want to argue that workers cum consumers and homeowners get the first bailouts (as it is they who will have to collectively pay it all back through taxes) and secondly that any cash that does go to the financial sector comes at a high price in terms of large public ownership. AND not the kind where the public buys the toxic junk and lets J.P Morgan buy the performing assets!

We ought to recall just how savagely public assets were raided by capital during the last 20 years. Why not insist on a reverse fleecing whereby the only shareholders which get reasonable treatment are institutional investors such as pension funds the rest are left to eat cake.

In the more medium to long term something has to be done to reverse the situation whereby workers wages are stagnant and at the same time capital has so much cash on hand that they can’t find legitimate places to invest and so buy into pyramid schemes masquerading as financial innovations or bubbles or both as the case now seems to be.

All of this points in the direction of extremely strong labour rights clauses and enforcement mechanisms in trade agreements because the present imbalances are being driven by the core neoliberal imbalance between workers and capital. If workers are given the legal tools to organize and take on employers at the bargaining then some modicum of parity could be restored between wages and profits which would go some way to resolving the demand flaw at the heart of neoliberalism.

I got back from the university this afternoon to discover that my two month old kitten was in the process of dying.  Called the veterinarian and described the symptoms: vet said you are right your kitty is dying.  You have two choices.  You can wait it out with your kitten for the next two to eight hours or you can bring your kitten in and we can put it down for you.  This put me in a dilemma.  What should I do?  I had three options.  (1) Take the cat to the vet: cost three hours + fee. (2) Stay with the cat and try to make him as comfortable as possible until he died: cost 2-8 hours. (3) Or ignore the cat altogether, do my work and let him die alone and dispose of him later: cost 0 hours, cold heart.

Ranking of choices in order of efficiency assuming my time is worth something:

3, 1,  2.  I choose 2.  Clearly, I am not suited to a leadership role.

The CBC has reported that the staffer did it.  When offering his resignation he said:

Neither my superiors in the Office of the Leader of the Opposition nor the leader of the Opposition was aware that I had done so.

The article goes on to say that:

Lippert, a former policy analyst for economic think-tank the Fraser Institute, has announced his resignation from his current position working in the Conservative campaign headquarters.

A former analyst for the Fraser Intitute.   Shocking given the quality of research over there.  The irony of it all.

Dans les dernières deux semaines il y’avais une grosse crise financière. Pendant la première semaine de la crise, entre la Fed et Le Trésor Américaine,  le gouvernement Américain a donné environ 1,2 milliards de support pour les marchés financiers.  Mais il reste un problème, les marchés de crédit sont encore brisés. Il y’ avais un problème de liquidité.  A cause de ca, le secrétaire du trésor monsieur Paulson et son chum Ben Bernake, le chef de la Fed, faisaient une proposition pour le plus grand plan de sauvetage économique depuis la grand Dépression des années trente : un cadeau de 700 milliard pour la bourse financière.  Mais hier la chambre des représentants du Congrès a dit “non”. Apparentement les citoyens Américains ont besoin de plus de respect.     Par conséquent, les bourses à travers le monde ont diminué beaucoup.  Cette crise est tellement dramatique : peut-être elle est une indication de la fin du modèle capitaliste Américain.

I am sure my head is going to blow up if I read one more story about this election where such and such candidate is being asked to resign for something they said or did in the past.  Let the voters in that riding decide.  Furthermore, letting fringe actions / ideas out in the open for debate is for the most part a good thing.  They can be debated and where in serious error corrected.

If such and such a riding wants to elect a former or existing streaker, stoner, conspiracy theorist, potty mouth, eccentric, borderline racist etc., that is their business.  We have had Prime ministers that talked to their dogs and gotten policy advice from fortune tellers.  We have a sitting Premier of a province who was busted for drinking and driving a SUV well on vacation in Hawaii.  To be human is to err and it takes all kinds to make a democracy go around.  Enough with the moral panicsters and the politeness police.

Mark Carney finally gave some evidence to back up what had been until today’s release just a claim about the relative health of Canadian Banks.

Canadian institutions are in considerably better shape than their international peers. Their losses on structured products have been relatively modest.⁴ More importantly, their absolute leverage is markedly lower. As a simple illustration, major Canadian banks have an average asset-to-capital multiple of 18. The comparable figure for U.S. investment banks is over 25, for European banks is in the 30s, and for some major global banks is over 40.⁵

My question is why are Canadian banks so “lightly” leveraged in comparison with their peers?  Is this a case of regulation, a culture of prudence, or both?

Now to the subject of my post. The following quote from Carney’s speech:

While the globalization of financial markets and services has led to a more efficient allocation of capital on a global scale, it has also made it easier for financial difficulties to spread across national borders.⁶

Let us re-assemble that.

Proposition (A): Financial globalization has led to a more efficient allocation of capital.

Proposition (B): Financial globalization has made it easier for the transmission of financial difficulties .

Translate (A): Capital is free to move where it finds the best risk/return (effeciency).

Translate (B):  Capital is free to move out of where it was effeciently missallocated.

Rewrite: Globalization has led to a more effecient allocation and misallocation of capital.

Travis Fast

Paulson with a straight face said something to the effect of “I do not know where you all got the idea I did not want oversight, of course I want oversight.”

Hmm, I think maybe this paragraph from his legislative proposal might be responsible

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

The liberals have been and are being incredibly weak in the run up to and during this election.  We can usefully look at the liberal plan mark 1 and mark 2.

Liberal environmental plan:

Mark 1: Carbon tax good: direct, elegant, transparent and least easy to game.

Mark 2: Revenue neutrality bad: done for political expediency but actually confused the message and undermined the strength of the plan.

Deficits:

Mark 1: Deficits are sometimes necessary: infinitely reasonable proposition.

Mark 2: Deficits will never happen with the liberals in power:  Hmm, which crystal ball do they have?  Even in the face of a protracted recession?  Wow have they been sleeping? The whole world is old school Keynesian now.

Income trusts:

Mark 1, 2 & 3: Same bad policy position.  Don’t trust me ask Jack Mince.  If he and I are on the same page you know trusts are bad policy.  Probably one of those policies that we could fairly describe as pork that will produce bacon for the party coffers.

Consequence:

The liberals look indecisive on good policy and consistent only when it comes to saving their own bacon.  Partly they are the victims of their past success in out-flanking the right on the issue of fiscal “prudence” and the evilness of deficits.  The liberals of course used these two battering rams with great effect against the left-flank, both inside and outside their own party.  To call that hysteresis, is to fail to appreciate irony.

Looks like I got 2 trillion in proof and a Nobel economist on my side.

Stiglitz interview in the Huffington Post

Gardels: What, then, is the ultimate impact of the Wall Street meltdown of market-driven globalization?

Stiglitz: The globalization agenda has been closely linked with the market fundamentalists — the ideology of free markets and financial liberalization. In this crisis, we see the most market-oriented institutions in the most market-oriented economy failing and running to the government for help. Everyone in the world will say now that this is the end of market fundamentalism.

In this sense, the fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism — it tells the world that this way of economic organization turns out not to be sustainable. In the end, everyone says, that model doesn’t work. This moment is a marker that the claims of financial market liberalization were bogus.

Travis Fast

Seeing how the democrats seem incapable of figuring out the boondoggle Bernake and Paulson are in the process of engineering I thought I might outline a modest proposal for a fair resolution to the present financial crisis.

Buy two trillion of toxic sub-prime at 40 cents on the dollar; disaggregate, repackage and re-sell back to existing home owner for 50 cents of the original face value. The taxpayer realizes a 25% ROI, and average Joe gets his house for half the price of its originally bloated asking price. That effectively puts a floor on valuations and ensures that those who took the risks suffer the losses.

Maybe the haircut could be a little less severe say 60 cents and resold at 70 cents for an ROI to the taxpayer of 16.66%. But whatever the discount the plan covers all the bases: it both socializes the risks and the profits.

The plan can be defended against all criticism by simply repeating the following phrase:

It might be costly but it is less costly than doing nothing.