Gangster Capitalism: Same as it ever was?

If you are going to read one thing and just one thing on the financial crisis and how it is working itself out you need to read this blog post at naked capitalism:  the one stop shop for understanding contemporary finance.

After the September 2008 crash, Iceland’s government took over the old, collapsed, banks and created new ones in their place. Original bondholders of the old banks off-loaded the Icelandic bank bonds in the market for pennies on the dollar. The buyers were vulture funds. These bondholders became the owners of the old banks, as all shareholders were wiped out. In October, the government’s monetary authority appointed new boards to control the banks. Three new banks were set up, and all the deposits, mortgages and other bank loans were transferred to these new, healthier banks – at a steep discount. These new banks received 80 percent of the assets, the old banks 20 percent.

Then, owners of the old banks were given control over two of the new banks (87% and 95% respectively). The owners of these new banks were called vultures not only because of the steep discount at which the financial assets and claims of the old banks were transferred, but mainly because they already had bought control of the old banks at pennies on the dollar.

The result is that instead of the government keeping the banks and simply wiping them out in bankruptcy, the government kept aside and let vulture investors reap a giant windfall – that now threatens to plunge Iceland’s economy into chronic financial austerity. In retrospect, none of this was necessary. The question is, what can the government do to clean up the mess that it has created by so gullibly taking bad IMF advice?

In the United States, banks receiving TARP bailout money were supposed to negotiate with mortgage debtors to write down the debts to market prices and/or the ability to pay. This was not done. Likewise in Iceland, the vulture funds that bought the bad “old bank” loans were supposed to pass on the debt write-downs to the debtors. This was not done either. In fact, the loan principals continued to be revalued upward in keeping with Iceland’s unique indexing designed to save banks from taking a loss – that is, to make sure that the economy as a whole suffers, even suffering a fatal austerity attack, so that bankers will be “made whole.” This means making a windfall fortune for the vultures who buy bad loans on the cheap.

Go read the whole article.

The Circus of Greed: the Political Economy of Ratings Agencies

Would be hard not to know by today that the S&P downgraded the US .  What is less well known is why it is further evidence of the circus of greed that is the American financial and political system.  First, read this post by Bill Mitchell, S&P decision is irrelevant.  If you are pressed for time just scroll down to where he talks about Japan’s experience with the ratings agencies.  Next go read this excellent post over at Naked Capitalism, Matt Stoller: S&P’s Predatory Policy Agenda.

Now remind yourself how poorly the ratings agencies did at rating the TBTF financial institutions in the walk up to the crisis.  Now ask yourself why ratings are not being done by competent, independent, and a not for profit third party.

The love which dare not speak its name

People who would want to avoid reading my dissertation or anything about neoliberalism but nonetheless would like to have some idea about what has been going on in the world of public policy and economic policy in particular ought to read the 24 page special publication by the OECD “Evolving Paradigms in Economic Policy Making.” It is a fairly interesting document given its understated criticisms of macroeconomic policies and downright silences on key policies which it had a hand in crafting and popularizing. The document is filled with tap dancing around the elephants in the room. Here is how they deal with the last crisis:

Indeed, the repetition of bubbles and busts from the late 1980s until the early 2000s, such as the Savings and Loans, LTCM, Asian and dotcom crises, had not only macroeconomic origins, but was also associated with, partly misguided, financial innovation…..With hindsight the dotcom bust in 2000-01 should have been taken as a warning signal that systemic risk was unduly increasing…..Monetary policy appeared to be generally successful in this period, with low and stable inflation and generally well-anchored inflation expectations. But it was not sufficiently recognised that this outcome was helped by globalisation, a positive aggregate supply shock that kept inflation low – at least until oil and
commodity prices surged……Fiscal consolidation also looked successful, but – as has been a recurrent theme in the OECD’s economic history – failure to attain sound underlying public finances was masked by very favourable cyclical developments…..While structural policies had been successful in several countries, there was little international coordination on policy choices, contributing to the persistence of cross-country imbalances in savings and investment and widening global imbalances (Figure 4)…..Finally, the potential for systemic financial risks was not effectively monitored, such risks being viewed as low as long as stability-oriented macroeconomic policies were pursued and micro-prudential regulation was conducted effectively.

OK now pay attention because here is the conclusion drawn from the above:

All this [the above] explains how problems in a small corner of US financial markets (subprime mortgages accounted for only 3% of US financial assets) could infect the entire global banking system and set off an explosive spiral of falling asset prices and bank losses in 2008 and 2009. Consumer and investment demand quickly started to fall in the United States. As the US financial crisis intensified, weakness spread globally. With wholesale money markets freezing up, companies started to liquidate inventories and in late 2008 world trade nose-dived. The sharpest contraction since the Great Depression of the 1930s unfolded (p.12).

Wha? First off, government fiscal policy had nothing to do with it. Even if they had run super macro-prudential budgets that would not have stopped the financial markets from imploding. And why is the OECD arguing that governments should have been running their budgets as though they were in a permanent recession? So that line is just a sop to austerity ville and its citizens. Second, I can’t get to global financial meltdown from their list. If they really believe that just 3% of US financial assets under management were the cause of the global crisis they need a much braver laundry list. In any case, one word you will not read is “neoliberalism”. Instead you will be treated to vague sentences which read: “The prevailing paradigm largely survived the post-dotcom experience” (p. 11). It is odd that a prevailing paradigm should not have name. What prey tell came after Keynesianism?

And here is the problem with this retrospective on changes in macroeconomic paradigms. Namely, it is yet another instance where one of the leading institutional protagonists of neoliberalism is simply dodging its responsibility. Nowhere is there even a hint of contrition that labour market policy was exactly the least significant area that should have been paid attention to. The OECD spent the better part of 10 years focussing advanced capitalist policy makers on the need to flexibilize labour markets to almost the exclusion of all else. Indeed, in Alan Greenspan’s famous phrase, they spent from the mid-1990s to the mid 2000s ‘traumatizing workers’. One would be hard pressed to find any research during that time frame coming out of the OECD cautioning about systemic risk, regulatory capture (corruption is the word we Europeans use for the third world), or the dangers of financial deregulation. If the researchers at the OECD are suppose to be guiding policy makers towards best practice they did a horrible job. Not only did they cut your unemployment benefits they did nothing to help make sure you would not need them.

To add insult to injury, as Paul Krugman notes, in their 89th economic outlook they are pushing for the further traumatization of workers via higher interest rates and fiscal austerity.

For fiscal policy, exiting from crisis measures and restoring sound public finances is likely to continue well into the medium term. The pace of the exit should be commensurate with the state of public finances, the ease of sovereign funding, the strength of the recovery and the scope for monetary policy offsets. It should also take into account that delays in fiscal consolidation might increase interest rates and future growth. A credible fiscal consolidation will likely improve financial market conditions and hence the monetary transmission mechanism.

Furthermore, fiscal consolidations in which expenditure reductions have a high weight are more likely to result in durable retrenchment (Guichard et al., 2007) and more likely to be accommodated by monetary policy once it has departed from the zero-rate bound. Even so, tax increases look unavoidable in view of the size of the consolidation requirements. It is important that consolidation be growth-friendly. For example, raising the retirement age could bring long-term gains while having only limited effects on near-term growth. Priority should be given also to reducing the distortions created by subsidies and tax expenditures, and tax increases should be focused on the least distortive taxes such as on overall consumption and immovable property (p.14).

What is that about never letting a crisis that you helped create go to waste? I am just going to call this tax paradigm what it is (if your under six close your eyes): Fuck the fixed or FIF. Say it with a crappy mob accent and pretend you are an OECD economist acting macho. Next time you see a house or a worker with medium to low portable skills just say FIFem. There is of course never any mention of policies that would arrest mobile factors from playing the arbitrage game. That would of course be downright un-neoliberal and certainly too much to ask of one of the central institutional protagonists of the paradigm which dare not speak its name.

The right of the community to know and love one another

Guest Post By Elleni Centime Zeleke

Hot on the the heels of my last post on romance and because I am still high from celebrating international women’s day I want to add a few more discussion points to the topic of love and capitalism.
I will start by restating some basic premises and then posing a question.

So, in the context of advanced capitalist societies self-interest is the only form of subjectivity that we are allowed to have access to. We believe that we can overcome the experience of being self-interested humans within the context of a romantic love relationship, but in fact the structure of our society is such that we can really never reconcile self-interest with the reproduction of longer-term cycles of community and collective life.

If we are rich or middle class enough,sometimes we survive as a couple and suffer the illusion that the needs of the individual have been reconciled with the needs of the collective (society). After all money can buy you love, houses, and comforts that keep the couple together and so it reconciles the couples desires with the needs of a consumer based society to reproduce itself.

So, to be sure in order to eat decent food coupling might in fact be a necessary institutional requirement of our time. But that is the point, it is a very historically specific institution, and as a social practice it is more akin to visiting the toilet than any real creative ambition.

Now, to be sure humans are also animals and so we make pragmatic choices in order to survive. It is better to piss in a toilet than to piss randomly and wherever the wind takes you.

But in this sense romance turns us into animals driven by instinct rather than self-critical thought.

Interestingly, we like to gaze at backward women in other countries and feel sorry for them because we see them as passive victims of patriarchy. But romantic coupling is a social arrangement produced in the context where we are all passive victims to narrowly defined goals that are motivated by self-interest rather than self-critical and collectively defined activity. And yet, as we have been saying, to act as a self-interested human being is not natural, it is a political project that we all accept in the advanced capitalist countries as nature and so we fashion our love and our behaviour accordingly.
In my previous post I told the story of the prisoner because he offered a different way of being in the world. His confidence in loving me came from the fact that he did not doubt for a moment that we shared the same world. As a loving man he insisted that the collective be the front and centre of any decision making, even if his body suffered to some degree because of that. His act of love was a sign of maturity that moves us beyond the animality that most romantic partners indulge in for the entirety of their lives.

Marx asked us to rethink whether it was possible to reconcile the right of poor people to survive with a regime of private property rights. I do think that a corollary to that question is whether it is possible to reconcile romantic love with the right of the community to know and love the world that we all have already made and need to remake together?

I am a Homo and a Sapien* what is Paul Krugman?

Krugman is sometimes a dull example of all that is both right and wrong with mainstream liberals in North America.  Today Krugman auto deconstructs:

Ideas Are Not The Same As Race

I would get into the specifics of his post but the headline is so atrocious and such a shining example of why economists are simply undereducated in the social sciences, humanities and hard sciences.  Here is the short of it, both race and gender are ideas in that they have no scientific merit.   Take a look at this little graphic from wikipedia

See anything missing after species?  Yep, lower than that and they are just ideas, not necessarily nice ideas but ideas nonetheless.

His title is thus a non sequitur wrapped inside a false antithesis.

Sad really.

*Excuse the botched singular.

The fringe responds to Krugman and wins Jack-ass Economist of the year 2010 prize

I do not know nor have I read, nor do I have any friends who know or who have read Stephen Williamson. Apparently he graduated from Rochester. Who cares? What is sad about his post is that he gets almost everything wrong–to get everything wrong would be a triumph of sorts. No heterodox economists do not hate math. The most significant elements of the heterodox community have been both well versed in both math and linux (sadly). The Sraffians for example are a very math oriented bunch so much so that given the weight of their critique and mathematical proofs the lauded Samuelsonian school had to beat a hasty retreat into of all things hermeneutics to defend orthodox capital theory. Marxist economists have long been enamoured with math. You just do not get a calculation debate without math. Moreover all the new solutions to the so-called transformation problem have been fought out using math. Further the most recent high profile heterodox economist Steve Keen has been championing hard math for analysis of capitalist economies. Some might even say his reliance on hard math is the Achilles heal of his hard predictions.

There is no shortage of math on the so-called heterodox side of the economics profession there is, however, a shortage of insecurity masquerading as self-assured arrogance which truth be told is the real dividing line between the orthodox and the fringe.

PS. What a shameless display of disrespect to Douglas North who by the fringes’ account is one of the chief protagonists of neoclassical imperialism. Williamson does not even know who his own ideological generals are. But I guess that is what you get when you purge historical memory from orthodoxy.

Reform of the Century? US Health Care

To my mind the most interesting aspect of the health care debate south of the border is just how far off the actual legislation was from the rhetorical flourishes and hubris.

Paul Krugman thinks the fact that Markets Yawned is evidence of just how crazy those to the right of him are. What he misses of course is that the Yawn betrays just how little was really accomplished. Between the hyperbolic claims of Stalinistic socialism and the hubris of “Reform of the Century” what the actual legislation would seemingly indicate is just how impossible it is to get good coherent legislation drafted in the US. The markets yawned because they seem pretty convinced it is more or less business as usual in US health care.

The over the top rhetoric may produce good sound bites for the coming elections but they really do serve to mask the degree to which the US political system is almost completely captured by big, especially myopic and above all rich private interests. That all the political actors want to engage in theatrical spectacle is more than a little telling.

Stiglitz: Capitalism is Characterized by Big Bubbles and more

Stiglitz is one of the few (liberal) economists who is not suffering from a massive bought of cognitive dissonance owing to the GFC. This hour long interview with Joseph Stiglitz is well worth watching. Don’t have an hour? Then watch the first fifteen minutes.

Matt Taibbi on Class Welfare and the Crime of a New American Century

I encourage people to read Matt’s full blog post. Below I have reproduced what I think to be the most insightful elements: or when Matt hits high dough. Particularly when he argues that the causes of the great financial crisis were in fact legally sanctioned fraud carried out under the watchful eye of a bought and paid for state. And that really is the truth that dare not speak its name.

After the start of the GFC I wrote:

Hedge fund managers were before congress justifying their pay packages and arguing against regulation while pointing the finger of blame at the ratings companies for the crisis; aka scam, aka market failure. So which is it? Everyone agrees that crisis surely fits the bill, but the characterization of the crisis as originating in a scam or a market failure of epic proportions is being ruled out of court.

Here is the dilemma: characterize the crisis as a scam and then people will have to go to jail. The problem is that if this be a scam it involves almost every single major player in the financial and political establishment in the US. In short, call it scam and a huge swath of the US ruling class would be on the hook.

However, if the crisis is characterized as a massive market failure (and massive is no mere hyperbole, perhaps understatement) then 30 years of patient theoretical innovation in the dismal science not to mention the ideological underwriting service it played for the institutional restructuring of the past thirty years will have to be re-thought.

Here is the core of Taibbi’s recent take on the GFC:

What’s so ironic about this is that Brooks, in arguing against class warfare, and trying to present himself as someone who is above making class distinctions, is making an argument based entirely on the notion that there is an lower class and an upper class and that the one should go easy on the other because the best hope for collective prosperity is the rich creating wealth for all. This is the same Randian bullshit that we’ve been hearing from people like Brooks for ages and its entire premise is really revolting and insulting — this idea that the way society works is that the productive ” rich” feed the needy “poor,” and that any attempt by the latter to punish the former for “excesses” might inspire Atlas to Shrug his way out of town and leave the helpless poor on their own to starve.

That’s basically Brooks’s entire argument here. Yes, the rich and powerful do rig the game in their own favor, and yes, they are guilty of “excesses” — but fucking deal with it, if you want to eat.

And the really funny thing about Brooks’s take on populists… I mean, I’m a member of the same Yuppie upper class that Brooks belongs to. I can’t speak for the other “populists” that Brooks might be referring to, but in my case for sure, my attitude toward the likes of Lloyd Blankfein and Hank Paulson has nothing to do with class anger.

I don’t hate these guys because they’re rich and went to fancy private schools. Hell, I’m rich and went to a fancy private school. I look at these people as my cultural peers and what angers me about them is that, with many coming from backgrounds similar to mine, these guys chose to go into a life of crime and did so in a way that is going to fuck things up for everyone, rich and poor, for a generation.

Their decision to rig the markets for their own benefit is going to cause other countries to completely lose confidence in the American economy, it will impact the dollar, and ultimately will make all of us involuntary debtors to whichever state we end up having to borrow from to bail these crimes out.

And from my perspective, what makes these guys more compelling as a journalistic subject than, say, the individual homeowner who took on too much debt is a thing that has nothing to do with class, not directly, anyway. It’s that their “excesses” exist in a nexus of political and economic connections that makes them very difficult to police.

We have at least some way of dealing with the average guy who doesn’t pay his debts — in fact our government has shown remarkable efficiency in passing laws like the bankruptcy bill that attack that particular problem, and of course certain banks always have the option of not lending that money (and I won’t even get into the many different ways that the banks themselves bear responsibility for all the easy credit that was handed out in recent years).

But the kinds of things that went on at Goldman and other investment banks, in many cases there are not even laws on the books to deal with these things. In some cases what we’re talking about is the highly complicated merger of crime and policy, of stealing and government, which is both fascinating from a journalistic point of view and ought to be terrifying from the point of view of any citizen, rich or poor.

Belief in Global Warming is being like a Marxist: You read it in the Wall Street Journal First

Part of the genius of Marxism, and a reason for its enduring appeal, is that it fed man’s neurotic fear of social catastrophe while providing an avenue for moral transcendence. It’s just the same with global warming….

 

That is genius.  Worrying about how humans organize themselves into ultimately counter-productive and anti-social  systems and then suggesting that none of it is natural and that we ought to do something about it is just crazy and apparently the hallmark of religious thinking.  But hey we have naturalized the state failure–market failure–state failure  cycle why not global warming too?  Rinse and repeat.