Europe as the Apocalypse

Here is a doom-and-gloom view of the world from the Wall Street Journal. They look at the problems in Europe and spin a tale of imminent calamity for the whole world. I, however, see the WSJ as a Cassandra:



The WSJ is like those prophets in mid 1940 wrote off England and proclaimed the end of the world as we know it and the start of a new age of barbarism. On the other hand, I believe in "muddle through". The Brits muddled, Hitler over-reached in Russia, and finally America joined the fray and the world managed to find a way to avoid the obvious bleak tragedy that all the experts foretold.

Understanding the Great Recession

Here is a short summary of a proposed explanation of the current economic collapse. This is a bit from a post by UC Berkeley economist Brad DeLong:

As I understand the Greenwald-Stiglitz hypothesis--about the Great Depression as applied to agriculture and about today as applied to manufacturing--it goes like this:

1. Rapid technological progress in a very large economic sector (agriculture then, manufacturing now) leads to oversupply and steep declines in the sector's prices. Poorer producers have less income. They come under pressure to cut back their spending. Others--consumers--are now richer because they are paying less for their food (or their manufactures), but their propensity to spend is lower than that of the stressed farmers or ex-manufacturing workers.


2. Moreover, the oversupply of agricultural commodities (or manufactured goods) means that only an idiot would invest at their normal pace in those sectors. To the shortfall in consumption spending is added a shortfall in investment spending as well.


3. Thus we have systematic pressures pushing spending down below economy-wide income. These aren't going to go away until the declining sector (agriculture then, manufacturing now) is no longer large enough to be macroeconomically significant.


4. Macroeconomic balance requires that the economy generate offsetting pressures pushing spending up. What might they be?


5. For a while, those receiving the income that farmers (or ex-manufacturing workers) have lost and those who use to invest in the declining sectors can lend it to the farmers (or ex-manufacturing workers) so that they can keep up with the Joneses. But lending more and more to poorer and poorer debtors is, like lawn darts, only all fun-and-games until somebody loses an eye.


6. An alternative possibility is to switch investment away from the farm value-chain complex (or the manufacturing value-chain complex) to something else. But what? Nobody really knows. The future is uncertain. Other investments are clearly riskier then funneling money into the old channels of boosting the capital of the farm value-chain complex (or the manufacturing value-chain complex) had been. Given the extra risks, this pressure can only manifest itself if the cost of capital falls. But here we hit the zero lower bound on interest rates. And we are off to the secular liquidity-trap races. This won't work either.

A very readable presentation of the thesis is in a Vanity Fair article by Nobel prize-winning economist Joseph Stiglitz.

Stiglitz on the Great Recession

Here is a bit from an article in Vanity Fair by Nobel prizing-winning economist Joseph Stiglitz looking at the similarity between now and the 1930s. It is dismal reading:

The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.

Until now, the Depression was the last time in American history that unemployment exceeded 8 percent four years after the onset of recession. And never in the last 60 years has economic output been barely greater, four years after a recession, than it was before the recession started. The percentage of the civilian population at work has fallen by twice as much as in any post-World War II downturn. Not surprisingly, economists have begun to reflect on the similarities and differences between our Long Slump and the Great Depression. Extracting the right lessons is not easy.

...

The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.

For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.

The value of assets (such as homes) often declines when incomes do. Farmers got trapped in their declining sector and in their depressed locales. Diminished income and wealth made migration to the cities more difficult; high urban unemployment made migration less attractive. Throughout the 1930s, in spite of the massive drop in farm income, there was little overall out-migration. Meanwhile, the farmers continued to produce, sometimes working even harder to make up for lower prices. Individually, that made sense; collectively, it didn’t, as any increased output kept forcing prices down.

Given the magnitude of the decline in farm income, it’s no wonder that the New Deal itself could not bring the country out of crisis. The programs were too small, and many were soon abandoned. By 1937, F.D.R., giving way to the deficit hawks, had cut back on stimulus efforts—a disastrous error. Meanwhile, hard-pressed states and localities were being forced to let employees go, just as they are now. The banking crisis undoubtedly compounded all these problems, and extended and deepened the downturn. But any analysis of financial disruption has to begin with what started off the chain reaction.

...

The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.

...

Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not. The good news (in a sense) is that the United States has under-invested in infrastructure, technology, and education for decades, so the return on additional investment is high, while the cost of capital is at an unprecedented low. If we borrow today to finance high-return investments, our debt-to-G.D.P. ratio—the usual measure of debt sustainability—will be markedly improved. If we simultaneously increased taxes—for instance, on the top 1 percent of all households, measured by income—our debt sustainability would be improved even more.

The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality. To that end, there are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation?

...

Americans in general are coming to understand what has happened. Protesters around the country, galvanized by the Occupy Wall Street movement, already know.

Shocking that greater productivity can cause an economic disaster. It should mean more goodies for everyone. But if you can't organize economic life in a way that everybody gets a fair share and decent opportunity, you are asking for a broken system that collapses around you. The Republicans and Democrats fail to address the fundamental problems of the current situation. Obama, the great hope of 2008, has been a complete bust, a flailing, useless, clueless fool who self-satisfiedly claimed he had done a "just right" stimulus as the economy flat-lined.

These are historic times and they require radical solutions under a leader of vision. Sadly the US has the oddly impassive Obama and the clearly incompetent and clueless Republican presidential candidates as the possible leaders after 2012. This says only one thing: the future will be incredibly bleak. There is a desperate need for a visionary leader with an understanding of economics and instead the US is stuck with buffoons and timid pretenders.

Understanding the Bank Bailouts

Here is one of the best explanations of how to understand the real effects of the bank bailouts, a post by Steve Randy Waldman on the blog The Big Picture:

Yes, Virginia, the banks really were bailed out.

by Guest Author

Steve Randy Waldman writes the blog interfluidity. His take is usually away from the mainstream, and always interesting.

~~~

I find it really depressing that I have to write this. But it seems I have to write it.

Substantially all of the TARP funds advanced to banks have been paid back, with interest and sometimes even with a profit from sales of warrants. Most of the (much larger) extraordinary liquidity facilities advanced by the Fed have also been wound down without credit losses. So there really was no bailout, right? The banks took loans and paid them back.

Bullshit.

Suppose you buy fire insurance from Inflammable Insurance. You pay $1000 for a year of insurance. There is no fire, so you make no claim. Next year, you find a different provider offering a better price, and you switch.

Soon after your relationship has ended, you discover that Inflammable failed to pay any claims at all during the year you were insured, because all customer premiums were diverted to the Cayman Islands and then spent on kiddy porn and Pez. Were you defrauded? Do you have any cause for complaint? After all, ex post your cash flows turned out to be the same as if you had been dealt with fairly.

Of course you have been defrauded. You did not get what you had paid for. You had paid for Inflammable to bear risk on your behalf. It did not do so. The money you paid was simply stolen.

In financial markets, risk-bearing is the ultimate commodity. It is what financial market participants buy and sell. As a financial speculator, I spend exorbitant amounts of money buying out-of-the-money options to limit my downside risk. The vast majority of those options expire worthless, just like the vast majority of fire insurance policies end with no claims paid. If only someone would give me all those options for free, or sell them to me for half the market price, or reimburse the cost of the options that I never end up using, I would be rich. Seriously, given the years I’ve been in this game, I’d be pretty set if I had my option premiums back. It doesn’t seem fair at all that I am confined to a modest middle-class life because I had to buy all this insurance I never used.

Cash is not king in financial markets. Risk is. The government bailed out major banks by assuming the downside risk of major banks when those risks were very large, for minimal compensation. In particular, the government 1) offered regulatory forbearance and tolerated generous valuations; 2) lent to financial institutions at or near risk-free interest rates against sketchy collateral (directly or via guarantee); 3) purchased preferred shares at modest dividend rates under TARP; 4) publicly certified the banks with stress tests and stated “no new Lehmans”. By these actions, the state assumed substantially all of the downside risk of the banking system. The market value of this risk-assumption by the government was more than the entire value of the major banks to their “private shareholders”. On commercial terms, the government paid for and ought to have owned several large banks lock, stock, and barrel. Instead, officials carefully engineered deals to avoid ownership and control.

But still. Everything worked out, right? It turns out that banks didn’t need to use the government’s giant insurance policy. It was just a panic after all!

Bullshit.

Suppose my kid’s meth habit got the best of him. He’s needs to come up with $100K quick or his dealer’s gonna whack him. But he’s a good kid, really! Coulda happened to anyone. So I “lend” him the money, even though he has no visible means of support and the sketchiest loan sharks in town wouldn’t give him the time of day. Now I believe in bootstraps and hard work, individualism and self-reliance. So I tell my son. “Son, you are going to pay me back every penny of that loan. You are going to work it off. I have arranged with one of my golf buddies, a guy who owes me a favor or three, a job that pays $200K a year. You’d better show up every day at 9 a.m. and sit behind that desk, and get me back my money!” And he does! After a year, he’s made me whole. What a good kid.

No bail out, right? He paid me back every penny! Worked it off!

Bullshit. The opportunity I provided him, the $200K job that he would not otherwise received without my intercession was a huge grant. On the open market, if I were to accept bribes from the highest bidder to wangle the job from my friend, that opportunity would be worth more than the $100K advanced. I paid my son’s loan with my own money. I just obscured the cash flows, so my son and I can pretend and sustain our mutual self-regard and our righteous disdain for the moochers and the hippies and the riff-raff.

After assuming the banking system’s downside risk, the US government engineered a wide variety of favorable circumstances that helped banks “earn” their way back to quasi-health. The government provided famous and obvious transfers like paying unwinding AIG swaps at 100¢ on the dollar. It forced short-term yields to zero and created an environment in which medium-term interest rates would be capped for several years, granting banks a near-risk-free arbitrage for a while. It emitted trillions in excess reserves on which it continues to pay interest. It forewent investigations and prosecutions that by law it should actively pursue, and settled what enforcement it could not avoid for token fees. Then there are the things conspiracy theorists and cranks like me suspect but cannot prove: that the government and the Fed have been less than aggressive in minimizing their costs when they or entities they controls (AIG, Fannie, Freddie) transact with large banks, that they have left money on the table where doing so could be hidden in arcane accounts or justified as ordinary transaction expenses and trading losses. Large banks have enjoyed some rather extraordinary results for allegedly efficient markets, quarters with large trading profits and no or very few losing days. Government housing policy is pretty overtly subject to a constraint that interventions must not provoke loss realizations for banks carrying bad loans at inflated values, or interfere with servicing revenues. (If you think I am overconspiratorial, I’m still waiting for an innocent explanation of this, from 1991.)

Pulling back from a shell game whose details are, by design, labyrinthine, check out the big picture. Since the beginning of the 3rd quarter of 2008 (Lehman quarter), US debt held by the public increased by 84%, from $5.28T to $9.75T (as of the end of Q2 2011). Depending on where you start, the growth rate of publicly held US debt prior to Q3 2008 had been ~8% per year (starting in 1970 or 1980) or ~4.5% (starting in 1990 or 2000). The growth rate since Q3-2008 has been 22.6% per year. The United States has issued between $3T and $4T more debt than would have been predicted by any reasonable estimate prior to the financial crisis. So far.

Hyman Minsky famously described crisis stabilization as a two-step process: First, the state/central-bank steps in as lender of last resort to halt the panic. Then the state must underwrite a program of massive deficit spending in order to “validate” — Minsky’s word — the fragile capital structures and the “innovative” business practices that proliferate during periods of tranquility.

Translating into current buzzwords, when the trouble begins there is a solvency crisis. It is converted into a liquidity crisis ex post by a firehose of net spending by the state. The current crisis has followed Minsky’s script perfectly. Banks’ ability to “pay back” bailouts has depended upon continued regulatory forbearance, tacit expectations of support if shit hits the fan again, and massive government debt issuance which resuscitated assets that would otherwise be worthless.

But who has lost anything from the bailouts? Wasn’t it a win-win? This all sounds very abstract. Where are the transfers?

If the government borrowed or printed a trillion dollars and gave the money to me, would there be any losers? If you don’t think there has been a wealth transfer, if you don’t think ordinary people have lost, please call your Congressperson and ask her to cut me a trillion dollar check. In some abstract sense, this policy of giving me money would push government debt higher. But that is so very vague a cost! I promise I’d do great things with a trillion dollars. My ideas are so much cooler than Goldman Sachs’, despite all the wholesome commercials they are running.

During the run-up to the financial crisis, bank managers, shareholders, and creditors paid themselves hundreds of billions of dollars in dividends, buybacks, bonuses and interest. Had the state intervened less generously, a substantial fraction of those payouts might have been recovered (albeit from different cohorts of stakeholders, as many recipients of past payouts had already taken their money and ran). The market cap of the 19 TARP banks that received more than a billion dollars in assistance is about 550B dollars today (even after several of those banks’ share prices have collapsed over fears of Eurocontagion). The uninsured debt of those banks is and was a large multiple of their market caps. Had the government resolved the weakest of those banks, writing off equity and haircutting creditors, had it insisted on retaining upside commensurate with the fraction of risk it was bearing on behalf of stronger banks, the taxpayer savings would have run from hundreds of billions to a trillion dollars. We can get into all kinds of arguments over what would have been practical and legal. Regardless of whether the government could or could not have abstained from making the transfers that it made, it did make huge transfers. Bank stakeholders retain hundreds of billions of dollars against taxpayer losses of the same, relative to any scenario in which the government received remotely adequate compensation first for the risk it assumed, and then for quietly moving Heaven and Earth to obscure and (partially) neutralize that risk.

The banks were bailed out. Big time.

When Obama initially took power and said that he wasn't going to "look back" and only "look forward", i.e. not pursue criminal charges against the Bush administration (or Wall Street). I was happy to go along because I thought Obama would have the guts and drive to set the economy right and help out the suffering populace. But over the past 3 years I've watched as Obama has done half measures, failed to do the substantive hard work to help the broad population while shielding the wrong doers, I've lost patience. Obama is a huge disappointment. He has failed the American people. It is time to get tough on the criminals in the Bush administration and on Wall Street. A thorough house cleaning is needed. Real change must come to America!

The Whole Dirty, Ugly $7.77 Trillion Truth is Now Revealed

The secret actions of the US government to keep the US banking system from complete collapse are now available. You can now read the gory details of how the US government "on behalf of the taxpayers gave away $1.2 trillion on Dec. 5, 2008 and, when you add up all the "free money" the banks got, it totals $7.77 trillion.

From a Bloomberg News article:

Secret Fed Loans Helped Banks Net $13B

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.”

The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.

...

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”

...

The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg.

The Fed funds also benefited firms by allowing them to avoid selling assets to pay investors and depositors who pulled their money. So the assets stayed on the banks’ books, earning interest.

Banks report the difference between what they earn on loans and investments and their borrowing expenses. The figure, known as net interest margin, provides a clue to how much profit the firms turned on their Fed loans, the costs of which were included in those expenses. To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during reporting periods in which they took emergency loans.

...

The U.S. jobless rate hasn’t dipped below 8.8 percent since March 2009, 3.6 million homes have been foreclosed since August 2007, according to data provider RealtyTrac Inc., and police have clashed with Occupy Wall Street protesters, who say government policies favor the wealthiest citizens, in New York, Boston, Seattle and Oakland, California.

The Tea Party, which supports a more limited role for government, has its roots in anger over the Wall Street bailouts, says Neil M. Barofsky, former TARP special inspector general and a Bloomberg Television contributing editor.

“The lack of transparency is not just frustrating; it really blocked accountability,” Barofsky says. “When people don’t know the details, they fill in the blanks. They believe in conspiracies.”

In the end, Geithner had his way. The Brown-Kaufman proposal to limit the size of banks was defeated, 60 to 31. Bank supervisors meeting in Switzerland did mandate minimum reserves that institutions will have to hold, with higher levels for the world’s largest banks, including the six biggest in the U.S. Those rules can be changed by individual countries.

They take full effect in 2019.

Meanwhile, Kaufman says, “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”

There is a lot more detail. Go read the whole article.

Freedom of the press is essential to a democracy. The fact that Bush and Obama administrations fought bitterly to prevent the electorate from knowing what sweetheart deals they gave the banks should be fully understood by American citizens. The US government is deeply corrupted by the banking system.

The fact that nobody has gone to jail for the multiple trillion dollar fraud committed by banks, mortgage brokers, assessors, ratings companies, and the big Wall Street banks that "financialized" junk debt into AAA bonds that quickly went bankrupt cries out for justice. The US government is fighting this tooth-and-nail. Heads must roll. The corruption must be rooted out.

The Occupy Wall Street and the Tea Party movements both agree on this one fact: the US political system has been corrupted by the banks.

Worst of all, the ultra-rich show complete contempt for the bottom 99%, the ordinary taxpayers and working stiffs, who don't get tax cuts and "special deals" from the government:

William Black Addresses Occupy LA

This is well worth listening very carefully to:



The tragedy is that Obama had the chance to take office and clean up the corruption. But he didn't. He allowed the Bush admin to walk away scott free. He has allowed fraudulent corporations to avoid justice. These crimes are behind the growing inequality in the US.

Right Wing Hysteria

The political right is in thrall to the ultra-rich who are always horrified by inflation because it can eat up their piles of money as a "hidden tax". But the reality is that, despite record deficits, the bond market is signaling no fear of inflation. But despite that, the Federal Reserve (and more especially the European Central Bank) are still rigorously fighting "inflation" while their economies erode into depression and inflation soars.

Here is a bit by PBS's Paul Solman:

... checking with NYU's celebrated economic historian Richard Sylla, we find that today's rates are astonishingly close to the lowest in the entire history of the United States: 1.85 percent, the nadir reached in late 1941. That was the record, I should say -- until September 22, when the 10-year U.S. interest rate plunged briefly to 1.695 percent.

So what's going on? Well, rather obviously, investors are a lot more worried about the credit of Greece -- or Spain or Italy -- than ours. Investors are also more worried about stock investments. Investors are also more worried about almost any other asset into which they might put their money.

Investors also seem pretty sure that U.S. inflation is not going to be a problem anytime soon. If inflation scared them, they'd hardly let the United States lock in an interest rate of less than 2 percent for an entire decade.

So then why isn't it plausible to draw the following conclusion: that U.S. interest rates have been going in the "wrong" direction because investors are scared that the U.S. is going to reduce its debt and deficits, and such a reduction might horse-collar the world economy?

In other words, might the true story plausibly be a complete contradiction of what is regularly reported? That's what Nobel laureate Paul Krugman of the New York Times has regularly argued, but his "opinion" hasn't managed to leak into everyday coverage.

Obama needs a massive WPA program. In fact the whole developed world needs to do deficit spending to revive the economy. In the meantime, they should re-regulate the bank with even more severe regulations than were brought in post-Great Depression and the bankers of the 1990-2008 era should all be jailed with long, long sentences. These thieves stole trillions of dollars from the bottom 99%. They make Bernard Madoff look like a piker and the corner store robber a joke. The real crime in America is in the boardroom and the legal system needs to go after these malfactors with a vengeance.

Instead of "inflation" being the enemy of the country, the real enemy is austerity imposed by the political right and their ultra-rich patrons, the 0.01%. The financial reality is that bond prices are showing deflation and into "inflation" as the biggest threat to America:

The United States has to pay less than two percent to borrow money for 10 years? That's anti-Chicken Little. Not the sky falling, but the interest rate plummeting. Exactly the opposite of all the dire warnings.

Okay, but we need a little context. How far has the rate fallen? Let's go to Yahoo! Finance for a chart. There, on the right, is a blue chart of the 10-year rate over the past year. OMG! It's down from 3.5 percent since about April. April. What happened in April?

Oh, right. S&P downgraded U.S. debt. (See note.) But wait a second. The bond vigilantes should then have forced us to raise our interest rate. Instead, they lowered it?

Okay, maybe April was an anomaly. So click on "5y" under the chart for a view of the rate over the past five years. Can it be? It looks like the 10-year rate is at the lowest point over the entire period! Lower even than in the depths of despair, the post-Lehman crash of late 2008.

One more attempt at context. Go to Bob Shiller's online chart, then open the Excel file to which this links. You'll find a chart of stock prices, in blue, and the 10-year bond rate, in red, reaching back into the nineteenth century. You'll note that today's 1.97 percent is about as low as our interest rate has ever sunk since at least 1880.

Where is the Economic Crisis?

The current fear roiling financial markets is the "debt problem" in Europe. But I have a hard time finding the problem. Look at this graph:

Click to Enlarge
Supposedly Greece, Italy, Spain, and Ireland are "hopeless debtors". But their debt isn't all that different from the debt of Germany or the United States.

Click to Enlarge
I'm suspicious that all the teeth gnashing and the howls of "we are all doomed!" are simply fear stirred up by financial ghouls who want to stampede markets so they can pick off the weak.

Governments should stand up to them. They should have a united policy of supporting their bonds to stop these financial attacks. Right now the only "winners" are those who feast of the fearful. The fact that governments around the world are letting fear stampede financial markets adds fuel to the flames. It only makes things worse. I simply don't understand why governments can't realize there is strength in numbers. The old Ben Franklin saying is relevant: "Yes, we must, indeed, all hang together, or most assuredly we shall all hang separately."

Sadly, the world does not have leaders worthy of it. Instead, spineless sold-out fools have maneuvered into power on the hopes of money and glory when in fact, the world needs leaders of principle who can make tough choices, tell the people the truth, and in fact lead them out of this mess.

The Depth of the US Housing Depression

Here are some facts from a story in Vegas Inc:

“In less than four years, more than 100,000 homes in Las Vegas have been lost through foreclosure. That’s 18 percent of our privately owned housing stock: that’s nearly one home in five. And we’re nowhere near finished with foreclosures. In all likelihood, we have another 100,000 yet to go, and at the current rate, that’s another four years,” Murphy said.

And this has hit house prices hard. Just in the last year:

In a market hit by high unemployment (13.6 percent) and an elevated foreclosure rate, the Realtors said the median price of single-family homes sold in October was $121,000. That’s down 1.9 percent from $123,400 in September and down 9 percent from $133,000 a year ago.

From the Calculated Risk site, the price of homes in Las Vegas is down 60% since the beginning of 2007:

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What is tragic is that the Republicans caused this Great Recession during the Bush administration and are doing everything they can to make it worse in order to win in 2012. And the salt in the wound is that Barack Obama had a chance to come in and really push hard to save Main Street after the failure of Wall Street, but he played "political games" and undersized the stimulus in early 2009 and then claimed it was "just right" in size when it was clearly too small and dithered for two and a half years before he got serious about attacking unemployment and the crushed economy... just in time to win another 4 years for his "do nothing" administration. Tragic.

How $700 Billion in Bad Debts Destroyed the World Economy

Want to understand how $700 billion in bad loans could take down a $14 trillion US economy and a $70 trillion world economy?

In an infamous speech on May 17, 2007 Ben Bernanke assured the world that the size of "bad loans" was limited and any problem with defaults would be "contained" and not have a big effect on the world's economy:

All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.

But as Matt Taibbi points out, the banks took that bad debt and effectively xeroxed it again and again makes copy after copy that it sold into the world's "derivatives" market ballooning the real losses up into trillions and trillions that were untraceable because the idiot US government under Greenspan, Bernanke, Summers, Rubin, and Geithner refused to regulate the derivatives markets despite the efforts by Brooksley Born to try and regulate it.

Here is the relevant bit from a post by Matt Taibbi on his Rolling Stone blog. Look at the bolded bit for the key fact:

Apparently people feel that by explaining how the banks profited from the explosion of subprime home loans, I’m somehow letting the ordinary homeowner who over-borrowed off the hook.

But the question was never, Do ordinary homeowners share any blame for the crisis? The question, as implicitly posed by Bloomberg, was, Is it true that the banks had NO blame for the crisis?

We can all argue about how big of a slice of the blame pie should be doled out to other actors – the irresponsible homeowner, the corrupted ratings agency analyst, the sleeping regulator, the do-gooder liberal congressman, etc. – later on. But what the mayor said, and Wall Street flaks have been saying for years, is that the banks shouldn’t eat any of that pie, and that they only made those loans because they were forced to, by Barney Frank and Franklin Raines and other such liberal meddling kids.

So let’s examine that for a minute.

For one thing, we know, because of investigations like Carl Levin’s inquiry into Washington Mutual and its subsidiary Long Beach, that these banks were often well aware that fly-by-night lenders like Countrywide and Long Beach were committing fraud on a massive scale – and bought their loans anyway, knowing they could still sell them off on the secondary market.

In 2005, for instance, Washington Mutual did an internal audit of two of Long Beach’s biggest offices, one in Downey, California, and one in Montebello, California. They found that 53 percent of the Downey loans involved some type of fraud, while the number in Montebello was 83 percent. The internal investigation drummed up the usual litany of unsafe financial sexual practices, using white-out to disguise low income levels, cutting and pasting info from good borrowers onto the loan applications of less worthy applicants, and so on.

So you know what WaMu did about all that fraud they found? Zip.

The company overrode its auditors and sold those phony loans off into the market anyway. And internally, they did nothing to change lending practices. WaMu did a follow-up investigation in 2007, and found the fraud rate at Montebello was still 62 percent.

So forget about the banks being dragged, kicking and screaming, to take on even legitimate loans for unworthy, overextended homeowners. Not only did the banks willingly take on every conceivable real home loan, government-backed or not – they even wanted the fraudulent loans, the loans that were not just likely to fail but virtually guaranteed to fail.

Why? Because they could. Because they were making huge profits hawking these bad loans to third-party customers who didn’t know what they were buying.

But here's the real kicker: when the banks milked the Countrywides and Long Beaches dry, and ran out of real people with pulses to lend homes to, they went out and made derivative copies of those "unworthy” lenders supposedly forced upon them by Barney Frank, and sold those copies off on the secondary market.

In other words, they were so “reluctant” to give that Oakland janitor a house that once they had his loan on their books, they promptly Xerox-copied him in the form of synthetic derivatives (essentially, bets on his home loan) and sold him off in five, ten, fifteen different directions. Janitor takes out home loan, bank tells two friends, and those friends tell two friends, and so on, and so on. The banks sold every one of those endlessly-replicating little squares and made cold hard cash each time.

You remember that notorious Abacus deal that Goldman Sachs was involved with, the one in which a pair of European banks, the Dutch bank ABN-Amro and the German Bank IKB, lost a billion dollars buying a portfolio of designed-to-fail mortgage-backed instruments hand-picked by a short selling billionaire named John Paulson?

Well, that portfolio that Goldman and Paulson dumped on those two banks was not, in fact, a portfolio of real subprime home loans. It was a synthetic CDO – a giant package of bets on subprime home loans.

Mike Bloomberg wants you to believe the banks didn’t want anything to do with those unworthy borrowers. Yet in reality, the banks not only went to every conceivable length to take on the home loans of those subprime borrowers, they actually invented new technology to make clones of those Barney Frank debtors.

And there were thousands upon thousands of those synthetic deals, meaning each and every of those deadbeat subprime borrowers have been Xeroxed by the banks fifty or a hundred times over, and are flying around the globe to this day as toxic assets.

Nomi Prins pointed out in her book It Takes a Pillage that we could have paid off every subprime loan in America at the start of the crisis for about $1.4 trillion dollars. But the bailouts ended up being four, five, perhaps as much as ten or twelve times that size.

Why? Because we weren’t paying off the underlying loans of those subprime, personal-responsibility-deficient homeowners. We were paying off the banks' bets on those loans. We were adopting all those clones they made.

Anyway, there's is a massive gap between making a bad decision with one’s personal finances and committing criminal fraud in billion-dollar amounts. Morally, the two acts are not even in the same universe.

The real crime is that Bush's administration refused to regulate the financial system and the Obama administration has refused to clean up Bush's mess and prosecute the trillion dollar fraud that destroyed the world's economy.

Why Are People Demonstrating in the Street

Here's a very simple, dollars-and-cents reason why the American people are angry and the Occupy Wall Street movement is growing. From a post by Paul Krugman on his NY Times blog:

Here, from the CBO report, are the changes, in percentage points, of the shares of income going to three groups. The top quintile excluding the top 1 percent – which is basically the abode of the well-educated who aren’t among the very lucky few – has only kept pace with the overall growth in incomes. Just about all of the redistribution has taken place from the bottom 80 to the top 1 (and we know that most of that has actually gone to the top 0.1).

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It’s a tiny minority, not a broad class of well-educated Americans, who have been winning here.

For over 30 years the bottom of the social order has been taking it on the chin as those in the top 1% (actually the top 0.1%) has bought politicians and corrupted the system to ensure their own "success". The cherry on top is the 2008 financial crisis. This was manufactured by Wall Street, it was fraud on an inhuman scale, they crashed the world economy, they got bailed out by the US taxpayer, and they even got to keep their multi-million dollar "bonuses for a job well done". Meanwhile, Main Street has been clobbered and is still flat on the mat 3 years later with no recovery in sight. No banker has gone to jail. No ratings agency executives have gone to jail for stamping junk mortagages as AAA "investments". That's why people are angry.

Here's Matt Taibbi characterizing this crappy situation:

Occupy Wall Street has not yet inspired many true villains outside of fringe characters like Anthony Bologna, but Bloomberg, with this one decision to trot out this preposterous schlock about congress forcing banks to lend to poor people, may yet make himself the face of the 1%’s intellectual corruption.

This whole notion that the financial crisis was caused by government attempts to create an "ownership society" and make mortgages more available to low-income (and particularly minority) borrowers has been pushed for some time by dingbats like Rush Limbaugh and Sean Hannity, who often point to laws like the 1977 Community Reinvestment Act as central villains in the crash drama.

But Rush Limbaugh and Sean Hannity are at least dumb enough that it is theoretically possible that they actually believe the crash was caused by the CRA, Barney Frank, and Fannie and Freddie.

On the other hand, nobody who actually understands anything about banking, or has spent more than ten minutes inside a Wall Street office, believes any of that crap. In the financial world, the fairy tales about the CRA causing the crash inspire a sort of chuckling bemusement, as though they were a tribal bugaboo explaining bad rainfall or an outbreak of hoof-and-mouth, a legend good for scaring the masses.

But nobody actually believes them. Did government efforts to ease lending standards put a lot of iffy borrowers into homes? Absolutely. Were there a lot of people who wouldn’t have gotten homes twenty or thirty years ago who are now in foreclosure thanks to government efforts to make mortgages more available? Sure – no question.

But did any of that have anything at all to do with the explosion of subprime home lending that caused the gigantic speculative bubble of the mid-2000s, or the crash that followed?

Not even slightly. The whole premise is preposterous. And Mike Bloomberg knows it.

In order for this vision of history to be true, one would have to imagine that all of these banks were dragged, kicking and screaming, to the altar of home lending, forced against their will to create huge volumes of home loans for unqualified borrowers.

In fact, just the opposite was true. This was an orgiastic stampede of lending, undertaken with something very like bloodlust. Far from being dragged into poor neighborhoods and forced to give out home loans to jobless black folk, companies like Countrywide and New Century charged into suburbs and exurbs from coast to coast with the enthusiasm of Rwandan machete mobs, looking to create as many loans as they could.

They lent to anyone with a pulse and they didn’t need Barney Frank to give them a push. This was not social policy. This was greed. They created those loans not because they had to, but because it was profitable. Enormously, gigantically profitable -- profitable enough to create huge fortunes out of thin air, with a speed never seen before in Wall Street's history.

The typical profit-generating cycle of subprime lending took place without any real government involvement. Bank A (let’s say it’s Goldman, Sachs) lends criminal enterprise B (let’s say it’s Countrywide) a billion dollars. Countrywide then goes out and creates a billion dollars of shoddy home loans, committing any and all kinds of fraud along the way in an effort to produce as many loans as quickly as possible, very often putting people who shouldn’t have gotten homes into homes, faking their income levels, their credit scores, etc.

Goldman then buys back those loans from Countrywide, places them in an offshore trust, and chops them up into securities. Here they use fancy math to turn a billion dollars of subprime junk into different types of securities, some of them AAA-rated, some of them junk-rated, etc. They then go out on the open market and sell those securities to various big customers – pension funds, foreign trade unions, hedge funds, and so on.

The whole game was based on one new innovation: the derivative instruments like CDOs that allowed them to take junk-rated home loans and turn them into AAA-rated instruments. It was not Barney Frank who made it possible for Goldman, Sachs to sell the home loan of an occasionally-employed janitor in Oakland or Detroit as something just as safe as, and more profitable than, a United States Treasury Bill. This was something they cooked up entirely by themselves and developed solely with the aim of making more money.

The government’s efforts to make home loans more available to people showed up in a few places in this whole tableau. For one thing, it made it easier for the Countrywides of the world to create their giant masses of loans. And secondly, the Fannies and Freddies of the world were big customers of the banks, buying up mortgage-backed securities in bulk along with the rest of the suckers. Without a doubt, the bubble would not have been as big, or inflated as fast, without Fannie and Freddie.

But the bubble was overwhelmingly built around a single economic reality that had nothing to do with any of that: new financial instruments made it possible to sell crap loans as AAA-rated paper.

Fannie and Freddie had nothing to do with Merrill Lynch selling $16.5 billion worth of crap mortgage-backed securities to the Connecticut Carpenters Annuity Fund, the Mississippi Public Employees' Retirement System, the Connecticut Carpenters Pension Fund, and the Los Angeles County Employees Retirement Association. Citigroup and Deutsche Bank did not need to be pushed by Barney Frank and Nancy Pelosi to sell hundreds of millions of dollars in crappy MBS to Allstate.

And Goldman did not need Franklin Raines to urge them to sell $1.2 billion in designed-to-fail mortgage-backed instruments to two of the country’s largest corporate credit unions, which subsequently went bust and had to be swallowed up by the National Credit Union Administration.

These banks did not need to be dragged kicking and screaming to make the billions of dollars in profits from these and other similar selling-baby-powder-as-coke transactions. They did it for the money, and they did it because they did not give a fuck who got hurt.

Who cares if some schmuck carpenter in Connecticut loses the pension he’s worked his whole life to save? Who cares if he’s now going to have to work until he’s seventy, instead of retiring at fifty-five? It’s his own fault for not knowing what his pension fund manager was buying.

And, of course, in a larger sense, the entire crisis was the fault of that janitor in Oakland, who took out too big of a loan, with the help of do-gooder liberals in congress and their fans in bleeding-heart liberal la-la land – you know, the same people Bloomberg wowed with his hep jokes about Snooki and Charlie Sheen.

This is the evil lie Bloomberg is now trying to dump on the Occupy movement. And the mayor put a cherry on the top of his Marie-Antoinette act with the rest of his speech:

"But [congress] were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it's one target, it's easy to blame them and congress certainly isn't going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for."

Bloomberg went on to say it's "cathartic" and "entertaining" to blame people, but the important thing now is to fix the problem.

Jesus … I mean, for one thing, Fannie and Freddie don’t even make loans. That’s how absurd this whole thing is.

And the condescension levels here are unbelievable, his air of aristocratic superiority almost breathtaking to behold. Listen to Bloomberg paternally conceding in one breath that it is certainly nice that some struggling people now have homes ("I'm not saying I'm sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn't have gotten them without that"), just before chiding us with the next that there are sometimes negative consequences to doing something that sounds like goodness, like giving people a place of their own to live.

And then there’s this whole line in which he professes to indulgently understand the need for the "catharsis" and "entertainment" of protest, again almost like a Dad who tells his idiot teenage son that he understands the need to sow a wild oat or two, but please don’t wreck the family Mercedes next time.

Well, you know what, Mike Bloomberg? FUCK YOU. People are not protesting for their own entertainment, you asshole. They’re protesting because millions of people were robbed, by your best friends incidentally, and they want their money back. And you’re not everybody’s Dad, so stop acting like you are.

And the real kicker to this depressing story: the American people voted for "change you can believe in" with Barack Obama, but he has delivered more Wall Street fraud and criminality. It is under Obama's watch that the banks have used "robo-signing" fraud to cheaply toss people out of homes, even people who don't have a mortgage and who legally fully own their own homes. The banks don't care. They are in a hurry and a little fraud here and a little crime there, big deal! Obama seems to agree. No bank has been indicted or charged for the pre-2009 fraud and certainly none has been charged for the 2009 through 2011 robo-signing frauds.

So... what are people to do? The two major political parties are bought-and-sold to the top 0.1%. The only recourse is to go to the street and fight to get the country out of the hands of criminals, to fight and stop America on its slippery slope to becoming a banana republic. It is a desperate battle, but it must be won. There is no other choice.

The How & Why of America's Political Failure

When big name, powerful politicians like Michael Bloomberg show that they are completely uninformed about how & why the US economy collapsed in 2008, then you can understand why the US is in its current mess. Big powerful people have "drunk the Kool-Aid". Bloomberg has ignorantly swallowed the lies of the political right. And he runs the premier US city. Tragic!

Here's the relevant post from Paul Krugman on his NY Times blog:

Michael Bloomberg, Ignoramus

Via David Dayen, the favored candidate of those who believe we need a smart centrist to solve our nation’s problems reveals himself to be completely ignorant about the causes of our economic crisis, someone who just swallows right-wing propaganda whole:

“I hear your complaints,” Bloomberg said. “Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t have gotten them without that.

“But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and congress certainly isn’t going to blame themselves.

You can read lots about how wrong this is; Mike Konczal has done it at great length, for example here. The fact is that for any public figure to go with the Congress-did-it argument at this stage is for him to reveal both that he is grossly ignorant about the central policy issue of the day and that he gets his “analysis” from right-wing flacks.

Some centrist hero.

There is no hope for the bottom 99% when the so-called "moderate" leaders are as clueless and misinformed as Bloomberg. This is a disaster of monumental proportions!

Get Ready for Another Big Bailout

Here is a bit from a post by Matt Taibbi in his Rolling Stone blog:

... when it comes to commercial banking, Bank of America is as bad as it gets.

The markets, of course, have lately come to agree, as B of A has lately been downgraded again to just above junk status. The only reason the bank is not rated even lower than that is that it is Too Big To Fail. The whole world knows that if Bank of America implodes – whether because of the vast number of fraud suits it faces for mortgage securitization practices, or because of the time bomb of toxic assets on its balance sheets – the U.S. government will probably step in to one degree or another and save it.

The government’s patronage of the bank was never clearer than in recent weeks, when B of A quietly decided to move trillions of dollars (trillions, not billions) in risky Merrill Lynch derivatives contracts off Merrill’s books and onto the books of the parent/retail arm, Bank of America.

This decision was done at the behest of counterparties to those transactions, who wanted those contracts placed under the aegis of Bank of America, whose deposits are insured by the FDIC. The move was made, according to reports, so that Bank of America could avoid posting $3.3 billion in collateral to satisfy the company’s creditors. In other words, Bank of America just got You the Taxpayer to co-sign as much as $53 trillion worth of dicey derivative contracts.

The FDIC wasn’t pleased by the move, but the Fed apparently encouraged it. Bloomberg, citing people with “direct knowledge” of the deals, reported that,

The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

So the primary regulator of the banking industry is encouraging a functionally insolvent megabank to respond to a credit downgrade by pushing its most explosively risky holdings onto the laps of the taxpayer.

...

A series of lawmakers on the Hill, including most notably Sherrod Brown, Carl Levin, and Bernie Sanders, are trying to figure out if there’s any way to stop this transaction, but of course there is not. Upstate NY congressman Maurice Hinchey put it best. "What Bank of America is doing is perfectly legal – and that's the problem,” he said.

This is exactly why the Glass-Steagall Act needs to be reinstated: without a separation of Investment Banks and Commercial Banks, what we end up getting is taxpayer-guaranteed gambling. Instead of encouraging prudence and savings by insuring deposits in commercial banks, the FDIC is now being turned into a vehicle for socializing speculative losses.

So our government is not only no longer encouraging fiscal conservatism, it is doing exactly the opposite, i.e. encouraging speculation and risk-taking. That this is happening in the fever of the OWS movement, and at a time when top politicians from Barack Obama on down are paying lip service to public complaints against Wall Street, should tell you everything you need to know about whether or not we can expect this government to voluntarily enact real changes, and stop making the taxpayer eat Wall Street’s pain.

This is criminal. The FDIC should refuse. But obviously the Obama administration is backing the Federal Reserve and allowing this abomination to go ahead. Shame on Barack Obama!

Krugman Identifies the Real Radicals

From Paul Krugman's NY Times blog:

The Amnesiac Economy

Mark Thoma sends us to John Cassidy on the absence of really new ideas in this crisis — largely because we didn’t need new ideas, all we needed for the most part was to remember things that we somehow forgot.

This is a theme dear to my heart. The crisis we’re in is not something unprecedented. It’s a close cousin to the Great Depression — milder, but recognizably the same sort of thing. And we understand — or used to understand — how the Depression happened, and what to do in such a situation. Most of what’s required are fairly straightforward translations of existing concepts. For example, we have a pretty good understanding of bank runs; extending that framework to shadow banking requires little more than the understanding that repo and other kinds of short-maturity obligations are, from an economic point of view, more or less equivalent to deposits.

So how is it that policy is so confused and lost?

I’ve been arguing for a while that much of the economics profession has lost its way, recapitulating old errors because it made a point of unlearning what Keynes taught. But it’s not just economists who willfully threw away hard-won insights.

On Monday night we had a panel discussion of the euro crisis at Princeton — me, Chris Sims, Hyun Shin, Markus Brunnermeier. I was struck by some of what Sims had to say. He pointed out that central banks have always had a wider mandate than simply guaranteeing price stability; they’ve always served as lenders of last resort, including having a standby capacity to finance the government in times of need. And there are good, well-understood reasons for this wider mandate. Yet the creators of the euro essentially threw away hard-won wisdom — stuff that Bagehot knew in the 19th century! — to create a stripped-down central bank without the powers or flexibility that history has shown are necessary. What were they thinking?

The result of all this is that the supposedly sober, serious people are actually radicals insisting that we can make the economy work in ways that it has never worked in the past — hence the embrace of magical thinking on expansionary austerity and the power of structural reform. Meanwhile, the irresponsible bearded professors are actually the custodians of traditional wisdom.

And those who are determined to forget the past run a high risk of reliving it — which is why we’re in the state we’re in.

The similarity of the arrogance shown by many "economists" and the EU bank is the same kind of arrogance shown by the neo-cons and Donald Rumsfeld. It is a willful rejection of the past and a claim to "superior" knowledge that is based not on fact and theory but on a willful distortion to fit a preconceived ideology. History is replete with this kind of "radical" taking control and wrecking things while claiming "superior knowledge".

Stable societies have traditions and accreditation requirements put in place to prevent these usurpers from taking control and wrecking things. Private business faces a similar problem with psychopaths take high positions. These are individuals with no regard for others an an overweening sense of self that lets them wreck everything about them for their own gratification or sense of self importance.

The New Sing-Along: Too Big to Fail

Here is Merle Hazard back with another instant classic:



Here's the accompanying blurb about the song from Merle Hazard's web site:

“The Ballad of Diamond Jim” is out! It’s a twangy western number about banking regulation. Thanks to Paul Solman of the PBS NewsHour for his awesome interview with MIT’s Simon Johnson about this song, and for writing about it.

Saving Your Honour by Committing Suicide

The Europeans have painted themselves into a corner. They have created a European bank that has no tools to deal with the current mess. Worse, the elite of Europe refuse to admit the mess they are in. They refuse to think creatively about a solution. It is as if the crew over a sinking ship is fighting for control of the pilot's wheel. But steering isn't the problem. The ship has a big hole and is taking water and now quickly sinking. But the crew is too busy trying to "take charge" of the situation of "piloting" to bother with "sinking".

Here are key bits from a NY Times op-ed by Paul Krugman:

If it weren’t so tragic, the current European crisis would be funny, in a gallows-humor sort of way. For as one rescue plan after another falls flat, Europe’s Very Serious People — who are, if such a thing is possible, even more pompous and self-regarding than their American counterparts — just keep looking more and more ridiculous.

...

Think about countries like Britain, Japan and the United States, which have large debts and deficits yet remain able to borrow at low interest rates. What’s their secret? The answer, in large part, is that they retain their own currencies, and investors know that in a pinch they could finance their deficits by printing more of those currencies. If the European Central Bank were to similarly stand behind European debts, the crisis would ease dramatically.

Wouldn’t that cause inflation? Probably not: whatever the likes of Ron Paul may believe, money creation isn’t inflationary in a depressed economy. Furthermore, Europe actually needs modestly higher overall inflation: too low an overall inflation rate would condemn southern Europe to years of grinding deflation, virtually guaranteeing both continued high unemployment and a string of defaults.

But such action, we keep being told, is off the table. The statutes under which the central bank was established supposedly prohibit this kind of thing, although one suspects that clever lawyers could find a way to make it happen. The broader problem, however, is that the whole euro system was designed to fight the last economic war. It’s a Maginot Line built to prevent a replay of the 1970s, which is worse than useless when the real danger is a replay of the 1930s.

And this turn of events is, as I said, tragic.

The story of postwar Europe is deeply inspiring. Out of the ruins of war, Europeans built a system of peace and democracy, constructing along the way societies that, while imperfect — what society isn’t? — are arguably the most decent in human history.

Yet that achievement is under threat because the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.

Now maybe European leaders will come up with a truly credible rescue plan. I hope so, but I don’t expect it.

The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later.

This is the kind of blindness you get from ideology. An ideologue doesn't look outside to see if it is sunny. He consults his horoscope because he "knows" that the horoscope captures everything essential about his future. You can't convince the fool that the horoscope was written days or weeks ago, that an astrologer has no knowledge of the future, and that the easiest way to check the weather is to look out the window. Europe is going down and it will take the whole world just like the US took the world down when it refused to rescue the Lehman investment house in September 2008. What an incredibly stupid world.

I foolishly thought that humanity was slowly getting "smarter" as we got wealthier and better educated. I failed to realize that if you can't fix the idiocy of ideology, then the craziness of people who "know" things because their ideology tells them it is so will destroy the world. I've always puzzled how powerful civilization in the past could commit suicide. I now realize it comes about by the elite of those societies getting deeply committed to their ideology and refuse to peek out the window to see whether the sun is shining or not. Incredible!

Sadly nobody will win this prize:

“Lord Wolfson, a prominent eurosceptic . . . is offering £250,000 to the person who comes up with the best plan for winding up the euro in an orderly way. The Wolfson Economics Prize . . . will be the second-largest cash prize for an academic economics after the Nobel Prize.” – Financial Times, October 19

Why? Because the ideologues in Europe refuse to accept that there is a problem with the euro, with deficits, and with the European bank. Sure they will admit to "problems" but not enough to actually address the oncoming catastrophe. This big prize won't be won because you can't "solve" a problem when the problem is stupid people blind to their own stupidy and refusing to even listen to the voice of reason!

The How & Why of America Now Being a Banana Republic

People used to joke about how the US might become a banana republic. But the joke is over. It is reality. The rule of law has completely broken down in the US.

Here is a post by Barry Ritholtz in his The Big Picture blog:

Fraudclosure Errors Destroying Americans’ Property Rights

by Barry Ritholtz

Over the past 2 years, I have warned repeatedly about the dangers to American property rights caused by massive bank fraud, A deadly combination of MERS, robo-signing, and illegal shortcuts have created a horrific situation. A bedrock of our society — the ability for the owner of a piece of real estate to confidently convey that property, along with all associated property rights — is now in danger.

It was the inevitable result of the frauds that too many state Attorneys General seem unwilling to prosecute.

The end results of that massive fraud, and the State’s refusal to hold the wrongdoers accountable, are simply this:

“The highest court in Massachusetts ruled that a homeowner who bought a foreclosure that hadn’t been properly conducted by the foreclosing bank in 2006 didn’t have legal ownership of the property.

The decision by the Supreme Judicial Court casts a cloud over the legal ownership of any properties in Massachusetts where banks didn’t properly convey title when foreclosing. The problem has gained attention nationwide because of banks’ use of “robo-signing” and other dubious practices that may have broken chains of title on foreclosures.

The case follows a previous state court decision that voided a foreclosure when banks couldn’t prove that they owned mortgages when they initiated foreclosure proceedings.”

(WSJ, State Rules on Foreclosure)

The Rule of Law is yet another bedrock foundation of this nation. It seems to get ignored when the criminals involved received billions in bipartisan bailout monies.

The line of bullshit being used on State AGs is that we risk an economic crisis if we prosecute these folks.

The people who claim that fail to realize that the opposite is true — the protest at Occupy Wall Street, the negative sentiment, the general economic angst — traces itself to the belief that there is no justice, that senior bankers have gotten away with economic murder, and that we have a two-tiered criminal system, one for the rich and one for the poor.

Today’s NYT notes the gloom that has descended over consumers, and they suggest it may be home prices. I think they are wrong — in my experience, the sort of generalized rage and frustration comes about when people realize the institutions they have trusted have betrayed them. Humans deal with financial losses in a very specific way — and its not fury. This is about a fundamental breakdown of the role of government, courts, and leadership in the nation. And it all traces back to the bailouts of reckless bankers, and the refusal to hold then in any way accountable.

There will not be a fundamental economic recovery until that is recognized.

Obama is part of the problem and not part of the solution. I could go along when he claimed he didn't want to press charges against Bush administration officials for war crimes. I could understand that was disruptive and would bring out the worst of partisan politics. But when Obama refused to prosecute the fraud and crime among the financial industry, he lost my respect. He is part of the problem. As Ritholtz points out: the economy will not revive until the rule of law is restored in the US. Sadly, there is not one presidential candidate in either party who has indicated a willingness to restore the rule of law.

Inside Job

I watched the documentary Inside Job tonight. It is an excellent review of the fraud and corruption behind the 2008 financial crisis. The film makes it very clear that the entire industry is corrupt and it has completely corrupted the government including both major parties in the US.



If you want to understand the Occupy Wall Street protests, watch this film!

If you want to understand the true scope of the crime of the Wall Street bankers, go look at these pictures and read the stories of these people.

And here is MSNBC's Dylan Ratigan praises the movie Inside Job and briefly talks to the director Charles Ferguson and to Bill Black, the 1990s savings & loan regulator who cleaned up that mess and has been publishing lots and lots on the 2008 fraud and corruption:



Go watch this movie. I borrowed my copy from the library. Go get your hands on it and watch it!

Self-Inflicted Helplessness

The political and monetary authorities have behaved wonderfully since the 2008 collapse. They are shown brilliantly the technique called learned helplessness. Or so the story goes.

In truth, the leaders have simply ignored their responsibility and their capability and are abetted by their enablers, the media. Here's a bit by Dean Baker on his Beat the Press blog pointing this out:

The Post Wrongly Tells Readers That Central Banks Can't Do More to Boost Growth

In an article about the IMF reversing its pro-austerity stance, the Post told readers:

"Central banks, which have already reduced interest rates to extremely low levels, have little remaining ability to boost economic activity."

This is not true. Central banks could explicitly target higher rates of inflation. This would lower real interest rates and reduce debt burdens. This policy has been advocated by many prominent economists, including Paul Krugman, Ken Rogoff, the former chief economist of the IMF, and Ben Bernanke when he was still a professor at Princeton.

I'm reading Sylvia Nasar's Grand Pursuit and it really, really sad to realize that this same flailing about and impotence in the face of a crying need for action marked the 1930s as it does today. It simply means that tens of millions suffer because the "leaders" can't lead. Instead the leaders are fearful of "little voices" in their heads whispering about dreaded inflation or the need to appease some hidden actor requiring "confidence". Even in the 1930s there were a number of leading economists, Keynes being the preeminent example, who properly diagnosed the situation and gave political and monetary authorities the needed guidance. But then, as now, these "leaders" simply ignored the advice and played their hand as if the economy were a morality play requiring "excesses" to be punished by many, many years of suffering by the innocent, the unemployed workers with absolutely no responsibility for the crash.

A Day Late and a Dollar Short

The "poltics" in America is pathetic. Nobody is addressing the real needs. The major parties are playing a three card monte game with posturing and distractions. This day late and a dollar short politics has got to end.

Here's a bit from a relevant Robert Reich post:

Republicans are debating again tomorrow night. And once again, Americans will hear the standard regressive litany: government is bad, Medicare and Medicaid should be cut, “Obamacare” is killing the economy, undocumented immigrants are taking our jobs, the military should get more money, taxes should be lowered on corporations and the rich, and regulations should be gutted.

Four years ago the most widely-watched TV debate among Republican aspirants attracted 3.2 million viewers. This year it’s almost twice that number. And for every viewer assume a multiplier effect as he or she shares what’s heard with friends and family.

Americans are listening more intently this time around because they’re hurting and they want answers. But the answers they’re getting from Republican candidates – tripping over themselves trying to appeal to hard-core regressives – are the wrong ones.

The correct ones aren’t being aired.

That’s partly because there’s no primary contest in the Democratic party. So Republicans automatically get loads of free broadcast time to air their regressive nonsense while the Democrats get none.

But even if the President had equal time, the debate about what to do about the crisis would still be frighteningly narrow.

That’s because the President’s answers don’t nearly match up to the magnitude of the crisis.

Without bold alternatives, Americans desperate for big solutions are attracted to bold crackpot ideas like Herman Cain’s “9-9-9” proposal, which would raise taxes on the poor and cut them for the rich.

This is where the inchoate Occupy Wall Street movement could come in. What’s needed isn’t just big ideas. It’s people fulminating for them – making enough of a ruckus that the ideas can’t be ignored. They become part of the debate because the public demands it.

The biggest thing the President has proposed is a plan to create 2 million jobs. But that’s not nearly big enough. Today, 14 million Americans are out of work, and 11 million more are working part-time who’d rather be working full time.

The nation needs a real jobs plan, one of sufficient size and scope to do the job – including a WPA and a Civilian Conservation Corps, to put the millions of long-term unemployed and young unemployed to work rebuilding America.

I'm reading material from the 1930s and we've been down this path before. The politics is a distraction. We know how to fix the economy. It takes a big jolt of spending to fix the huge number of people caught in a credit squeeze. Pussyfooting around only stretches out the pain. Most politicians know this, but they aren't honest with the public. They would rather play their games and go for personal gain rather than do their duty and build a better tomorrow.